A few months ago, I argued that General Electric (GE) was being undervalued by the market, especially when considering its growth prospects. Since then, General Electric's stock has surged about 12%, nearly doubling the performance of the S&P 500 for the same time period. This move begs the question: Is General Electric still a good value at current prices?
Revisiting GE's valuation compared to peers
In an earlier article, I noted that General Electric appeared to be undervalued compared to its peers in the industrial segment. However, a refresh of this analysis is warranted as General Electric has since moved up in price. For peers, I will be using Emerson Electric (EMR), Honeywell (HON) and Siemens (SI). While none of these stocks are 100% similar to General Electric, they are a fair representation of the industrial segment.
First let us compare these stocks using their TTM PE ratios:
As can be seen, General Electric's valuation using TTM PE is barely above Siemens and well below both Honeywell and Emerson. However, the gap between these names has narrowed over the year. Earlier in the year, General Electric was trading at a paltry 16x multiple, a clear case of market mispricing.
However, since earnings can be easily manipulated by companies, it is best to use enterprise multiple, or EV divided by EBITDA, for comparison purposes. By using this method, we can factor in debt into our valuation while also reducing quarter to quarter earnings related fluctuations.
As can be clearly seen, General Electric continues to trade at a very large discount to its peers by enterprise multiple. Compared to Siemens, a company with arguable worse growth prospects, General Electric seems to be undervalued by at least 30%. Even slow to no growth Emerson trades at a premium to General Electric.
Now we can answer the question from the intro -- is General Electric still a good value at current prices? I would argue yes it is. General Electric appears to be attractively priced compared to its peers. However, as I have argued in the past, General Electric does deserve some sort of a discount since a large chunk of its earnings come from GE capital. General Electric will likely never achieve the multiple of a pure-play industrial stock as long as the company has significant exposure to finance via GE Capital.
GE Capital divestitures are well on their way
During its Q3 conference call, the company noted that it is aiming to lower GE Capital's contribution to its earnings mix. The key word during the call was a "simplification" of GE Capital, which I believe is more akin to making that segment smaller.
General Electric is making some moves to reduce the size of GE Capital. The company has previously announced plans to exit retail finance by IPOing its US based consumer lending operations. Do note that this segment represents about a third of GE Capital's revenues. The IPO is expected sometime in early 2014. General Electric has noted it may offer as much as 20% of the equity in the business during the initial offering, with the rest later on in the year.
Upside Catalysts: Massive aviation orders and a likely dividend boost
I have previous noted that General Electric has an absolutely massive order backlog. As of Q3 2013, this backlog stood at about $229B, with roughly half coming from the crucial aviation segment.
During Q4, General Electric was able to benefit from Boeing's (BA) success at the Dubai Air Show. Boeing booked about $95B in orders during the event, which translates into about $26B in estimated jet engines from General Electric. However, this segment has gotten some bad press recently as several Boeing 787 and 747-8s equipped with General Electric built GEnx engines have had software and icing issues. Do note that the company is expected to develop a software fix sometime in March 2014, which should alleviate some of the concerns.
Finally let us talk about General Electric's dividend. As I noted in my previous article, the company is very likely to announce a dividend boost soon. The last few quarterly dividend increases for General Electric have been announced in mid-December, typically for $0.02 per share. If this $0.02 per share increase trend continues, General Electric's forward dividend yield may boosted to 3.15% compared to the current 2.85%.
Along with share buybacks, General Electric's dividend is its primary method of returning capital to shareholders. YTD, the company has returned roughly $13.9B to shareholders in dividends and stock buybacks and is on track to return about $18B.
Final Thoughts and Conclusion
While General Electric is good value compared to its peers, this does not mean it is cheap. My reasoning for this is that 2014 EPS is likely to be impacted by the GE Capital divestitures coming next year. This may put some short-term pressure on the stock as year to year comparisons are hurt. However, earnings quality will improve, which will provide a long-term positive for the stock.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.