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Background and Thesis

The purpose of this article is to calculate the returns one can reasonably expect by buying General Electric Company (NYSE:GE). We believe the stock offers below average growth prospects in relation to price at 15.01x trailing 12-month earnings.

Company Overview

Margins still have a long way to travel to get to pre-crisis levels ...


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Revenues/Equity seem to have bottomed out ...


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Equity base growing very slowly ...


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ROE still well below average levels, significantly below pre-crisis levels and experiencing slow recovery ...


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Relative P/E trading below historical averages. Potential for multiple expansion ...


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Relative P/E has potential to go higher as ROE recovers ...


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Our EPS estimates ...


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Our price forecasts suggest $28 to $33 in 5 years ...


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Pension and Post Retirement Benefits are massively underfunded. In 2012, GE had approximately $55Bn in Pension and Post Retirement Benefit Plan assets and $33Bn in total underfunding. $20Bn of plan assets were in equities. If we assumed that the best way for GE to plug its pension underfunding would be to rely on equity gains, then its equity book would have to increase in value from $20Bn to $53bn over the next 5-10 years to avoid a drain on net income. Is this realistic? We think not ...


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Conclusion

If we exclude the $3 per share in pension and post retirement underfunding then we get an IRR of between 7% and 10% over the next 5 years. We do not believe that this makes for an attractive investment.


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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: General Electric Offers Investors Gross Returns Of Between 7 And 8% Over The Next 5 Years