Seeking Alpha
, AlexLeAnders (229 clicks)
Long/short equity, research analyst, tech, growth
Profile| Send Message|
( followers)  

Introduction

General Electric (GE) remains a compelling investment for investors over the long-term. I anticipate the stock to generate reasonable investment yields for the long-term. Furthermore, the company will continue to operate effectively while increasing dividend yields.

Qualitative Analysis

Source: Information pertaining to GE came from the shareholder annual report, along with YCharts.

The company's inventory levels continue to increase; this is a positive sign because it is indicative of future revenue growth.

(click to enlarge)

The days inventory outstanding has stabilized at 75 days. This implies that the company will be able to recognize revenues in future accounting periods once the inventory balances have been depleted. Higher inventory is generally indicative of revenue growth for future years. The high levels of inventory can be validated by the record backlog.

(click to enlarge)

Backlogs have increased from $175 to $210 billion between 2009 to 2012. This consistent improvement in backlog proves that General Electric will have additional revenue recognition in future periods. This should be able to offset any concerns of revenue growth in the immediate future.

(click to enlarge)

General Electric has been effective at managing its operations. In 2011, the company was able to generate profit margins that were able to exceed its ten-year average. 2012 has followed up that trend by increasing its profit margin to 9.26%. Both improving profitability along with revenue growth should keep investors upbeat on the company.

(click to enlarge)

General Electric reduced the total liabilities on its balance sheet from $200B in 2003 to $150B in 2012. The reduction in liabilities provides added financial stability for investors. It also helps shareholders in that it reduces the interest related expenses on the balance sheet.

Overall, the company is likely to generate more revenues in the future. The balance sheet has seen considerable improvement. The company has improved its profitability. The company is a good investment for those who have a low level of risk tolerance.

Technical Analysis

The stock is in a multi-year up-trend as it continues to move in a range bound pattern between the two trend lines. The favorable fundamentals further support the stock move, implying that the stock is likely to trend higher.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock could be due for a minor pull-back but remains in a multi-year up-trend.

Notable support is $18.00, $20.00, and $22.00 per share. Notable resistance is $25.86, $30.15, and $38.20 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

GE

Industry

Sector

S&P 500

Current Qtr.

2.90%

2.40%

75.70%

10.50%

Next Qtr.

7.90%

30.60%

26.40%

16.10%

This Year

9.90%

16.60%

28.20%

8.00%

Next Year

10.80%

18.90%

-11.10%

12.90%

Past 5 Years (per annum)

-3.30%

N/A

N/A

N/A

Next 5 Years (per annum)

11.30%

15.59%

13.43%

8.93%

Price/Earnings (avg. for comparison categories)

13.99

9.14

17.91

18.42

PEG Ratio (avg. for comparison categories)

1.24

-0.38

1.45

2.15

Source: Table and data from Yahoo Finance

Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 11.30% (based on the above table). This growth rate is below the industry average for next 5-years (15.59%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

0.33

0.37

0.36

0.43

EPS Actual

0.34

0.38

0.36

0.44

Difference

0.01

0.01

0

0.01

Surprise %

3.00%

2.70%

0.00%

2.30%

Source: Table and data from Yahoo Finance

The average surprise percentage is 2% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 1.52

14.86

2004

$ 1.65

16.52

2005

$ 1.58

17.01

2006

$ 2.00

14.69

2007

$ 2.18

13.83

2008

$ 1.72

8.08

2009

$ 1.01

13.5

2010

$ 1.06

15.98

2011

$ 1.24

13.85

2012

$ 1.29

16.14

Source: Data from YCharts

The EPS figure shows that throughout the 2003-2007 period, the company was able to grow earnings. Throughout 2007-2009, earnings declined. The decline in earnings was due to declining revenues. Following 2009, the company was able to grow earnings because of the improving economic environment.

(click to enlarge)

Source: Data from YCharts

By observing the chart, we can conclude that the business is somewhat cyclical and can be negatively affected by macroeconomics. Therefore, one of the largest risk factors to GE is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.

(click to enlarge)

By 2018, I anticipate the company to generate $2.48 in earnings per share. This is because of product growth, improving global outlook, cost management, share buybacks, and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.

(click to enlarge)

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

(click to enlarge)

Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

GE currently trades at $23.12. I have a price forecast of $21.80 for December 31st 2013. The stock is currently trading above fair valuation. The stock should be bought at pull backs as a part of a longer-term accumulation strategy.

Long Term

The company is a good investment for the long term. I anticipate GE to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). GE's primary upside catalyst is international expansion, product development, share buy-backs, organic growth and cost management. I anticipate the company to deliver upon my forecasted price target of $37.30 by 2018. This implies a return of 75.33% (including dividends) by 2018. This is a great return for a conglomerate.

Year

Dividend Yield @ $23.37 per share

Cumulative Total

2012

3.26

3.26

2013

2.95

2.95

2014

2.67

5.62

2015

2.42

8.05

2016

2.19

10.24

2017

1.98

12.22

2018

1.80

14.02

GE has a market capitalization of $239.8 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity. The risk is somewhat high (1.6 beta).

Conclusion

GE has managed costs effectively, innovated brilliantly, and aggressively invested. The company remains a top competitor in global markets.

The conclusion is clear: buy GE.

Source: General Electric: Sustainable Returns