Last May I wrote an article for Seeking Alpha entitled 'Bargain Hunting with Siemens and General Electric.' I did an in-depth analysis of the two stocks' pros and cons and concluded that at the time Siemens (SI) was the better overall bargain/value. At the time General Electric (GE) was trading for around $18.75 per share and Siemens was trading for around $86 per share. Both stocks since my writing of that article have appreciated in value quite a bit. GE now trades for $21.30 per share and Siemens trades for $101 per share.
Last week GE released its first-quarter earnings. The firm generated net income of $3.35 billion on revenue of $35 billion. This translated to an EPS of $0.34, a 16% increase from the same period last year. GE was able to beat the street's revenue expectations of $34.5 billion, but a lot of that beat was attributed to the sale of NBC Universal to Comcast (CMCSA) for $18.1 billion. The company was able to generate a growth in profit for five of its eight business segments with an overall earnings increase of 15%.
One of the largest lagging GE business units was the industrial business unit that reported a decline in profit of 6% to $22.67 billion. That decline and the commentary associated with it was a major disappointment to the street and helped fuel the post-earnings sell-off. The majority of the decline was attributed to the company's water and power unit division. As investment subsidies for wind turbines begin to phase out overall demand for these products has declined as well. That coupled with slower growth in both the U.S. and Europe means overall demand has steadily decreased resulting in lower sales and profit growth.
During the company conference call CEO Jeff Immelt had some sobering economic words saying that the quarterly results were mixed and that the current business environment in Europe remains challenging. The market interrupted this as not so good news and sold off the stock. Since reporting the stock has sold off 6%, trading down to the $21.30 per share level. In the weeks leading up to earnings GE stock traded as high as $23.90 per share, a price not seen since September of 2008.
On the bright side, GE equipment orders did increase for the quarter by about 10%. GE last week also mentioned that its aviation unit had a 47% spike in orders, mainly due to new orders coming in from Airbus and Boeing (BA). GE also announced earlier this month that it would be buying Lufkin Industries (LUFK) for around $3 billion. The Lufkin acquisition will give GE even more exposure into the new U.S. oil and natural gas boom and should translate into higher profits in the future as that industry continues to grow.
In regards to the company continuing to spend and paying the dividend Immelt said that GE planned to cut costs by about $1 billion this year in light of its mixed number. The company still plans to spend about $18 billion on dividend payments and share buy backs.
Even amongst the negative news on the stock and the company's mixed numbers I think the real question here is does a mixed quarter that still generated solid numbers warrant a 6% sell-off in the stock price? I think not, and I believe that the market is over reacting to the lackluster news coming out of the industrial unit and Europe. Even so, does GE now present a better value than it did a year ago?
The below chart compares both the current GE and the GE of a year ago on some of the company's core fundamentals. The below chart should help us in determining if GE now is a better deal than it was a year ago (even if it was at a lower stock price) or if GE a year ago was a missed opportunity.
GE Then (May 2012)
GE Now (April 2013)
Q1 Net Income (Millions)
Return on Equity
Cash and Equivalents
When looking at the above chart the 'Current GE' has shown growth and improvements in most areas, specifically in the return on equity and net income segments. GE in the last year has seen its profit margin decline as it tries to maintain its competitive edge and grow in two core stagnate economies (U.S. and Europe). The recent run up in the market (which brought GE along with it) has pushed the stock price up resulting in an overall lower dividend yield. Yet, outside of an unchanged dividend rate all of the other key metrics have shown some improvement year-over-year.
It is important to note that GE is not alone in experiencing a challenging environment in both the U.S. and Europe. Siemens, Honeywell (HON), and United Technologies (UTX) have all mentioned that they too are feeling the effects of these two stagnate and struggling economies. I think the silver lining coming out of all of this mixed news is that GE mentioned on its conference call that industrial orders rose to $216 billion, the highest ever in the company's history. This is a sure sign that although the global economy is not robust, growth continues to happen, however slowly. This news should only translate to higher profits in the future, especially for a company like GE that is tied to so many essential elements of the global economy.
Overall, I think the 'Current GE' presents a better value and especially after this recent market sell-off the new entry point is very attractive and should create excellent shareholder value for those who decide to jump in and capitalize on it.