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General Electric (NYSE:GE) shares have been in a strong, steady uptrend since hitting $14 per share late in 2011. Since that time, shares have risen about $10, or more than 70% on strong operating results, a record order backlog and improving conditions at GE Capital. While the low-hanging fruit has certainly been picked in terms of gains for GE shareholders, it is important for investors to know if there is additional potential upside to GE's business model. We'll take a look here to see if GE is worth your investment dollars at $24 per share given current expectations.

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To do this, I'll use an earnings model you can read about here in greater detail that uses earnings estimates and other inputs in order to compute a fair value for shares given current expectations. My inputs and sources are as follows: 1) current book value, 2) current dividend and 3) earnings estimates, all from Yahoo! Finance, 4) discount rate of 8.5%, 5) dividend growth rate of 5% per annum and 6) perpetual growth rate of 3%, all of which are my numbers.

2012

2013

2014

2015

2016

2017

2018

Earnings Forecast

Prior year earnings per share

$1.52

$1.64

$1.80

$1.98

$2.17

$2.38

x(1+Forecasted earnings growth)

7.90%

9.80%

9.80%

9.80%

9.80%

9.80%

=Forecasted earnings per share

$1.64

$1.80

$1.98

$2.17

$2.38

$2.62

Equity Book Value Forecasts

Equity book value at beginning of year

$12.03

$12.91

$13.91

$15.05

$16.34

$17.80

Earnings per share

$1.64

$1.80

$1.98

$2.17

$2.38

$2.62

-Dividends per share

$0.76

$0.80

$0.84

$0.88

$0.92

$0.97

=Equity book value at EOY

$12.03

$12.91

$13.91

$15.05

$16.34

$17.80

$19.45

Abnormal earnings

Equity book value at begin of year

$12.03

$12.91

$13.91

$15.05

$16.34

$17.80

x Equity cost of capital

8.50%

8.50%

8.50%

8.50%

8.50%

8.50%

8.50%

=Normal earnings

$1.02

$1.10

$1.18

$1.28

$1.39

$1.51

Forecasted EPS

$1.64

$1.80

$1.98

$2.17

$2.38

$2.62

-Normal earnings

$1.02

$1.10

$1.18

$1.28

$1.39

$1.51

=Abnormal earnings

$0.62

$0.70

$0.79

$0.89

$0.99

$1.10

Valuation

Future abnormal earnings

$0.62

$0.70

$0.79

$0.89

$0.99

$1.10

x discount factor(0.085)

0.922

0.849

0.783

0.722

0.665

0.613

=Abnormal earnings disc to present

$0.57

$0.60

$0.62

$0.64

$0.66

$0.68

Abnormal earnings in year +6

$1.10

Assumed long-term growth rate

3.00%

Value of terminal year

$20.08

Estimated share price

Sum of discounted AE over horizon

$3.09

+PV of terminal year AE

$12.30

=PV of all AE

$15.40

+Current equity book value

$12.03

=Estimated current share price

$27.43

According to the model, GE shares are still undervalued by about three dollars, or about 13%. However, it is important to understand this is not a nominal price target; rather, it is present value of GE's current business plus its future earnings. Thus, the fair value means that, discounting GE's future earnings at 8.5%, shares are still a buy at $27.43. Implicit in this is the idea that a large margin of safety is currently built into GE shares as they are trading substantially below that number today. Obviously, if you are considering a long position in a company, having a double-digit margin of safety is very attractive.

GE certainly has some factors regarding its business that could hamper further earnings growth in the future. For instance, GE Capital has been very publicly downsized in the past few years as the company's banking arm virtually consumed the company's industrial earnings in the years leading up to the crisis. GE had gone from an industrial manufacturing and services business to a bank with a side manufacturing and services business. This risk took GE shares to $6 during the depths of the financial crisis and accordingly, CEO Jeff Immelt has been deleveraging GE Capital ever since. While I agree with this strategy, as the bank had become far too large in my view, while the transition is occurring, declines in revenue could occur. In fact, GE has a real shot at posting less revenue in 2013 than it did in 2012 for just this reason. Still, GE Capital is likely to provide $6.5 billion in dividends to the parent company this year, according to management, which will nearly cover all common stock dividends based on GE's current share count and dividend per share. That is a mind-blowing amount of money and it shows that GE Capital is still a huge operation even after the downsizing effort.

But there are also reasons to be very bullish regarding GE's industrial business. Chief among them is the company's record order backlog of $223 billion. This is an astounding amount of orders GE has taken for its products and services and it means that revenue growth on the industrial side of the business is virtually assured for years to come. But that will only be true if GE can actually turn those orders into revenue. In previous quarters, I was glad to see the order backlog growing because it meant that GE was still a world class industrial that has the brand and people to attract new customers and retain existing ones. However, at some point, I'd like to see the order backlog start to shrink again because orders don't pay the bills; revenue pays the bills. GE will need to find new capacity in order to actually start filling orders in order to avoid impatient customers going elsewhere for their needs. While I love the fact that GE has so much brand equity that it can possess a backlog of years' worth of industrial business revenue I will start to be concerned if the orders aren't filled at some point soon. I just want to see the backlog growth cease and actually see a shrinking of the order book.

GE shareholders have been on a wild ride since the financial crisis but the patient ones who bought during the depths of the crisis have been rewarded quite handsomely. GE Capital is still a cash cow for the parent company despite being downsized since it sank company shares to $6 during the financial crisis. The industrial business is firing on all cylinders and the results can be seen in the company's prodigious order backlog. While I think GE is going to continue to grow earnings at a high single-digit rate for the foreseeable future, the risk I see to that is the company's order backlog. If customers have to wait too long they may look elsewhere, resulting in a loss of confidence in GE and potentially dire results long term. However, I will give management the benefit of the doubt and assume the problem is being solved as we speak. GE's combination of decent earnings growth combined with its Treasury-beating dividend and built-in margin of safety mean that shares are a good buy at $24 whether you're seeking growth or income.

Source: Why General Electric Still Has Substantial Upside