GE: Still a Bargain

The country’s largest mutual fund, also know as General Electric (GE), is starting to see renewed interest from small investors and institutional traders alike.

GE is also the ultimate recovery play on the United States and the global economy.

Through General Electric’s fourteen divisions, the company reaches into almost every aspect of our lives. From the trains, planes and automobiles that move people and products, to consumer goods, technologies, financial services, utilities and entertainment, it has a hand in just about every major industry around the world.

But you don’t need to know everything about the intricacies of each division. You just need to know that, if separated, each unit would be a leader in its industry.

These multiple units make GE incredibly diverse and more like a mutual fund than a single company. It also leaves GE more prone to broad economic cycles. This is a good thing, because as the economy turns the corner, GE will as well.

Here’s why GE is a great buy under $16, why the street still hasn’t jumped back in, and what they simply can’t seem to get through their heads.

General Electric’s Capital Finance Problem

GE has been trading in a range tight range since August. And, while it has more than doubled in value from its March lows, it sits well off its 2007 high of $41.

There are a number of reasons for the General’s situation, but the biggest reason is debt. Specifically the debt from GE’s Capital Finance unit, which has been plagued by concerns it would drag the company down with it.

While the impact of their finance unit was severe – a major concern earlier this year – the likelihood of a full-blown collapse now seems improbable. In fact, GE has been shoring up its balance sheets with asset sales and capital infusions. The real estate division is now the only unprofitable unit and, as Immelt reported, they have funded those debt obligations for almost all of next year.

And GE isn’t done yet. CEO Jeff Immelt has been very public about his desire to turn around the struggling NBC Universal unit, over the course of sales negotiations with Comcast (CMCSA) and could possibly sell its entire interest in the next few years. GE owns 80% of NBC.

A few of the highlights from the webcast last week included increased cash flow from operating activities to $4.4 billion and a shrinking of the Finance unit’s balance sheet – and it’s potential negative impact on the stock. In addition, its backlog of industrial products now sits at $174 billion – that’s a lot of product to produce, and income yet to be booked.

Why GE Is a Great Buy Right Now

At the height of the market mayhem last year, the world’s greatest investor – Warren Buffett, through Berkshire Hathaway (BRK.A) invested $3 billion as a measure of confident in GE and its directors. He received a 10% interest payments and warrants to purchase over 134 million shares of GE stock at $22.25. These options expire in 2013.

At the current market price, that’s a 41% increase in the stock.

And it gets even better. While GE has cut its dividend, which angered a lot of shareholders and dividend funds, at 0.10 a share it’s still a respectable 2.55%.

GE is going to fly under the radar for a while as it siphons large amounts of its cash flow to pay down that finance unit debt and reduce its loss exposures. This will take some time. In the meantime, earnings will look like they’re in park. The reality will be like a motorcycle that's rear wheel drive has been held off the ground while at full speed. When the bike is lowered back down – in our case, when the Capital Finance unit’s cash siphoning stops – this stock will take off.

As these capital obligations from the finance unit clear up, it won’t be too improbable to see GE’s dividend start creeping back up. However, GE’s story doesn’t stop with its Capital Finance unit. Here are four more reasons this stock is set to move higher.

• Stimulus. The full impact of the stimulus hasn’t been seen yet in the United States or in many of the countries around the world. These efforts should start to take affect in the Q4 and into 2010. GE’s focus on infrastructure and energy are going to pay off big for them.
  

• Green energy. Shipping roughly 1000 wind turbines for each of the last two years puts GE in a good place for domestic energy initiatives. While wind turbines won’t reignite this stock by themselves, their existence, along with the rest of GE’s green energy programs and products give them a leadership position in the sector.
  

• Global economies. Strong emerging markets positions around the world. Because of their global market approach to customers, it makes GE a great way to capitalize on growth around the world without investing in specific economies.
  

• Exchange rates. GE books a large amount of total revenues from overseas. With the dollar in a free fall not seen since earlier this year, a weak dollar helps income earned overseas impact the bottom line better.

After factoring in these factors, an improved economic outlook and Buffett’s investment, one of the biggest reasons that General Electric's stock will climb much higher is simply the return of the baby boomers to the markets. There are still trillions sitting in Treasuries earning little, if no interest.

As these "soon to retire-es" look to rebuild their portfolios, they will be looking for dividend-bearing stocks that can offer them security, income and the potential for price appreciation. GE fits the bill for all three.

And at any price under $16 a share, it’s a bargain.

Disclosure: No positions in any security mentioned above.

Comments

[GLove:]

GE historically manufactures their numbers with massaging of P&L line items such as tax and reserves.
They are a good play on a global recovery, but even the most optimistic number of $1.50/ share by 2011-2012 should only fetch a PE of 12-13X. Downside is much greater due to future RE writedowns and other assets being MTM.
Hold ... at best

Oct 21 05:18 PM

[PastTense:]

The concerns one has are solely about the finance unit: this could well turn out to be a black hole.

Oct 21 05:27 PM

[Advill:]

GE is so complex and has so many different fields, activities,countries, currencies etc that you really know what will come however a good rule is "what is good for GE is good for US".

If you think that GE decided to cut dividend (they were able to avoid it ) is because is part of an strategy of lowering expectations around them, eliminating pressure from Hedge funds and others, is not clear for me what is coming out, there but agree with you Buffet is into and he knows much more in detail the next 5 years strategy.

I´m long in GE too.
Regards.

Oct 21 11:04 PM

[SoDak:]

The corporate management (mismanagement) has a real credibility problem and will need to be "shaken up" before this stock can get past $20. This was one of the most trusted companies in the world at one time. The CEO said GE would not cut the dividend and shortly thereafter slashed it!! The company took $10 billion in TARP money, at the same time saying they didn't need it but it would give the company "flexibility." (the TARP has not yet been repaid) What a shame for a company that makes so many "best of class" products used around the world.
Seems most everyone tries to blame the laggard stock price on the GE Finance division woes. If that is truly the reason, then Finance was severely over-leveraged or took on excesive risk---another management issue. Look at the stock charts of several true financials like GS, JPM and WFC over the past year and see they've nearly fully recovered, in spite of taking TARP!!!
Shake up the management at GE already so, the stock can get moving onward and UPWARD!!!!

Oct 21 11:39 PM

[ex GE'er:]

Immelt is a pathological liar that has destroyed one of the finest companies in the world. I find it particularly telling that Jack Welch has completely distanced himself from the company, most likely due to his personal embarrassment over his selection of Immelt. This stock is going nowhere until the board removes both Immelt and Keith Sherin (CFO).

Oct 22 08:53 AM

[buoy:]

Good summary of GE, but I think its going to be a "long road."

Oct 22 08:59 AM

[Americanrm:]

Ditto on Immelt and Sherin. However, I agree with others regarding the complexity and diverse nature of GE. Although unlikely to fail in our lifetimes, current stategies might favor in-and-out speculators and day-traders, over dividend driven investors.

Predicting what GE might do in the short term, is like trying nail Jello to a tree...


On Oct 22 08:53 AM ex GE'er wrote:

> Immelt is a pathological liar that has destroyed one of the finest
> companies in the world. I find it particularly telling that Jack
> Welch has completely distanced himself from the company, most likely
> due to his personal embarrassment over his selection of Immelt. This
> stock is going nowhere until the board removes both Immelt and Keith
> Sherin (seekingalpha.com/symbo...).

Oct 22 10:22 AM

[Lou Siegs:]

Let's avoid the cram down on mgt. GE is a great buy using pure technical analysis. Valuing GECC at -0- and .28 share earnings it currently trades at 3.53 P/B and 14.35 P/E, slightly better than UTX and HON. GECC has $109.6 B in cash, a staggering sum. It's Liabilities to Assets is 89% exactly the same as MTB Bank who also has substantial RE loans and is back to its Fall '08 price. Beats the hell out of a 1 Yr. 2.5% CD!

Oct 22 11:18 AM

[Rong:]

I placed a buy order for 2000 @ $15.14, near today's opening, it filled; 1000, 600 & 400, traded above $15.20, made a new low of $15.11. Now it is $15.27, and if I do not see more red ink today, it will be a surprise.

Oct 22 11:29 AM

[AlanZ:]

Nice analysis and comments. I do not look at the technical details. I bought GE going down last year, and bought more at the bottom, and then more coming up. GE is one of the largest and the most diversified companies in the world with great products. Throughout this difficult time, they have remained profitable, despite a loss of over 15% of quarterly revenues from their peak. GE is only going to get better in the next year, and the stock will reflect it. I'm in for the long haul, and expect at least a 25-30 dollar price point in a year or so. Can't beat that kind of return. It's still a huge bargain.

Oct 22 03:47 PM