In the week following the Q1 2013 earnings release General Electric's (NYSE:GE) share price dropped more than 6%. JPMorgan downgraded the stock and cut its price target to $22, calling General Electric "dead money near-term."
Well, what does the future hold for GE? Today we will analyze General Electric Company in comparison to its main competitors in the Industrial Goods sector: Siemens (SI) and ABB (NYSE:ABB). Each of these companies have been competing and pushing their smart strategies to get ahead of the competition. Let us find out which company is leading among these three when it comes to an investment, and which is pushing down the industrial goods sector.
General Electric is the largest diversified industrial company in the world by market cap, currently at about $237 billion. That is about two and a half times the size of one of its closest competitors, Siemens AG. If you compare the revenue generating business units of these two giants, they are quite similar. But there is one that makes General Electric stand out from the pack. That division is GE Capital.
Investors who lived through the horrors of the great recession are well aware that GE Capital brought the company's share price to all-time lows, dropping to an adjusted closing price of $5.88 on March 5, 2009. In the immediate aftermath of the Lehman Brothers collapse panicked investors shed stocks of companies even remotely connected to the financial sector. For FY 2009, General Electric's largest revenue generating business was General Electric Capital, accounting for 33.7% of total revenue. The company's Energy Infrastructure business accounted for 26.2% of total revenue.
The company's management decided to improve GE Capital rather than dump it, promising to reduce that segment's revenue contribution to around 27% of the total by 2014. For FY 2012 GE Capital's revenue contribution was down to 30.6% while Energy Infrastructure increased to 33.9% of the total.
As evidence of the value of GE Capital to the company one only has to look at the company's most recent quarterly earnings report. In the first quarter of 2013 General Electric's extensive exposure to Europe proved to have a greater negative drag than anticipated. Industrial segment revenues (Power and Water, Oil and Gas, Energy Management, Healthcare, and Transportation) were down 17% in Europe, resulting in an 11% drop in profit. GE Capital posted a 9% increase in profit. General Electric is the only diversified industrial that has a presence in the financial sector.
What Does the Future Hold?
With the US Federal Reserve pledging to keep interest rates low for an extended period, the new and improved GE Capital should continue to benefit. While the world has yet to fully recover from the great recession, there is little doubt demand for cleaner energy in all forms will continue to grow. This is especially true in countries with exploding middle class populations, like China and India where GE has a strong presence.
GE vs. Competitors
GE's closest competitor is German goliath Siemens. A smaller competitor with less diversification is Switzerland-based ABB.
There are many ways to estimate the fair stock value of a company. For this purpose, we applied the discounted-earnings-plus-equity model developed by EFS Investment analysts to these competitors. The following table compares some key performance metrics for the three companies:
Trailing Twelve Month P/E
Net Income Growth (3 Year Avg)
Return on Equity
Upside Potential to Reach Fair Value
Data from Morningstar and Reuters as of 9 May, 2013
The calculations based on this model allow us to suggest the following: currently, both General Electric and Siemens stocks are undervalued, whereas the ABB stock is fairly valued. In addition, EFS's fair stock price valuation indicates that Siemens is trading at a bit higher discount.
All three companies have P/E ratios lower than the industry average. GE has the best looking P/B ratio and the highest current dividend yield. With negative income growth over the last 3 years, many investors would ignore ABB and focus their attention on General Electric and Siemens. Comparing the business segments of the two shows General Electric has six industrial revenue producing segments along with GE Capital while Siemens has four segments. However, the underlying business operations between the two are similar.
Siemens' stock price year over year gains of 11.5% trailed General Electric's gains of 15.59%.
Is General Electric "dead money near-term?" They may be right but in the near term the dividends are healthy and longer term prospects appear bright. The company recently acquired oil service provider, Lufkin Industries, to expand its reach into the oil and gas sector. Given the shale potential in the US you could make a strong case for investing in General Electric based solely on its increasing exposure to that sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.