While the S&P 500 had gained 11.44% year to date, leading conglomerates stocks had been outperforming the market, including General Electric Company (NYSE:GE) with 13.10% increase, United Technologies Corporation (NYSE:UTX) with 15.96% advance, and Textron Inc. (NYSE:TXT) with 20.10% surge as seen from the chart below.
Source: Google Finance
General Electric Company
General Electric Company (GE), with a market cap of $240.41B, is a diversified technology and financial services company and a leader in all markets in which it competes.
GE's latest M&A move was to acquire Lufkin Industries Inc. (NASDAQ:LUFK), which is a move to take advantage of an oil-drilling boom, as reported by Bloomberg. It is a move for GE to buy the synergies and growth, as said by an analyst at William Blair & Co. GE continues to expand into the industrial end and shrink GE Capital, where the last reported ENI balance had been reduced to $419B in Q4, 2012 as compared to $461B in Q1, 2011. GE also took a notable step to divest its 49 percent stake in NBC Universal on February 12, thus to better focus on the industrial market as well as return more capital to shareholders while retaining more cash for future M&A.
Analysts currently have a mean target price of $25.60 for GE, suggesting 10.73% upside potential. Analysts, on average, are estimating an EPS of $0.35 with revenue of $34.70B for the current quarter ending in March, 2013. GE is expected to report its Q1, 2013 earnings on April 19, 2013. In the last four quarters, GE had three positive surprises and one in-line result.
Fundamentally, GE has a higher net margin of 9.3% as compared to the industry average of 8.8% and generates a strong operating cash flow of $31.33B with a levered free cash flow of $27.83B. GE remains undervalued with its P/E of 16.5 and P/B of 1.9, as compared to the industry averages of 21.6 and 2.6, respectively. GE's Forward P/E of 11.8 is also below the S&P 500's average of 14.3. GE's valuation continues to be pressured by its financial arm, GE Capital.
Technically, GE continues to be on the long-term uptrend since mid-November, 2012. GE is currently hanging around its 50-day MA support while the technical trend is slightly bearish in the near term.
In short, GE is good for patient, long-term investors. While GE continues to refocus its diversified portfolio by divesting the media segment, reducing the financial arm, and expanding the industrial end, GE's bottom line continues to improve. GE continues to be a good candidate for short covered call option strategies and for investors who seek stable income. GE currently offers an annual dividend yield of 3.29%.
United Technologies Corporation
United Technologies Corporation (UTX), with a market cap of $85.90B, is a diversified conglomerate, providing high-technology products and services to the building systems and aerospace industries worldwide.
United Technologies continue to be associated with durability, balance and consistency. Otis Elevator Company, a major unit of UTX, had recently celebrated its 160th anniversary. Otis continues to expand globally and leads the industry with innovative technology. It is companies like Otis that contribute to the stability and durability of UTX.
On March 28, 2013, Morgan Stanley initiated coverage on UTX with an overweight rating and a price target of $105.00. Analysts currently have a mean target price of $100.48 for UTX, suggesting 7.22% upside potential. Analysts, on average, are estimating an EPS of $1.30 with revenue of $14.95B for the current quarter ending in March, 2013. UTX is expected to release its Q1, 2013 earnings on April 22, 2013. In the last 4 quarters, UTX had 4 positive earnings surprises.
Fundamentally, UTX has higher revenue growth in the past three years compared with the industry average. UTX's management also shows strong efficiency as its operating and net margins are both higher than the industrial averages. From the valuation perspective, UTX's P/E of 17.3 is currently below the industry average of 18.0 but above its five-year average of 14.6. UTX remains undervalued with its Forward P/E of 12.9, which is lower than the S&P 500's average of 14.3. UTX also generates a strong operating cash flow of $6.65B with a levered free cash flow of $2.68B. UTX also offers a steady dividend with an annual dividend yield of 2.28%.
Technically, UTX continues to be on the long-term uptrend since mid-November, 2012. However, UTX started to consolidate in mid-March, 2013.
In short, by resuming its $5.4B buyback plan in early February, 2013, UTX continues to deliver for its shareholders. UTX is expected to grow as its acquisition of Goodrich starts to pay off, and all other segments continue to rebound and benefit from overseas expansion. Any pullback will be a great buying opportunity for UTX for the long term.
Textron Inc., with a market cap of $7.87B, is a multi-industry company engaged in aircraft, defense, industrial and finance businesses to customers globally. TXT, with a beta of 2.65, has the highest volatility among the three companies reviewed in this article.
Analysts currently have a mean target price of $31.64 for TXT, suggesting 9.22% upside potential. Analysts, on average, are estimating an EPS of $0.46 with revenue of $2.89B for the current quarter ending in March, 2013. For 2013, analysts are predicting an EPS of $2.27 with revenue of $12.84B, which is 5.00% higher than 2012. TXT is expected to release its Q1, 2013 earnings on April 16, 2013. In the last 4 quarters, TXT had two positive and two negative surprises.
Fundamentally, TXT had stronger revenue growth in the past three years compared with the industry average. However, TXT's margins and ROE are all lagging the industry averages. From the valuation perspective, TXT's current P/E of 14.5 is below the industry average of 18.0 but above its five-year average P/E of 11.5. TXT's Forward P/E is also below the S&P 500's average of 14.3. Although TXT generates a solid operating cash flow of $927M with a levered free cash flow of $2.45B, TXT only distributes a small dividend of $0.02 per quarter, providing 0.28% annual dividend yield.
Technically, TXT is on the uptrend since December, 2012. However, TXT started to pull back since mid-March, 2013 and had bounced back from its support around $28.00 in the last two trading days.
In short, similar to GE, TXT's valuation is pressured by its financial operation. However, TXT's diversified holdings, including Bell Helicopter and Cessna Aircraft should provide the growth for TXT in the long term. In the near term, it is crucial to see if TXT can bounce back to its 50-day MA to determine its near-term direction.
For investors interested in a solid industrial play, UTX is the best bet as it continues to benefit from improved global economy. GE, however, offers the most diversification with strong potential in energy and the power infrastructure market while it continues to reduce its risks from the financial arm. TXT is the most volatile stock among the three, and it is safer for investors to monitor its short-term technical trends before establishing the long-term position.
Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE, UTX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.