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Summary

  • GE's TV advertising supports its brand from an investor's perspective.
  • The company presents an image of innovation and technology, which separates it from its rivals.
  • So despite quantitative metrics that seem to say it should be valued lower, its value-added brand building supports demand for the stock and a higher valuation for its shareholders.

Have you seen the latest General Electric (NYSE:GE) television commercial? The company calls it Childlike Imagination - What My Mom Does at GE. Having recently perused a GE annual report and the company's website while considering its strategy, the commercial struck me a bit differently than it might strike the average American. I noticed a value-add in the company's advertising that I believe contributes to a richer earnings multiple for the company's stock. And then I had the "Aha!" moment, realizing that the company has been wisely doing the same thing with its brand building for decades.

"My mom," the daughter says proudly, "she makes…

  1. Underwater fans that are powered by the moon.
  2. Airplane engines that can talk.
  3. Hospitals you can hold in your hand.
  4. My mom can print amazing things right from her computer.
  5. My mom makes trains that are friends with trees."

And then the little girl stares right into the camera and tells us, "My mom works at GE," with a soft and warm smile. The images presented with the little girl's verbal perspective show us the amazing technologies she's speaking about in a way that makes them even more fantastic, because it is again from a little girl's perspective. But we understand, nonetheless, exactly what innovation she is speaking of. It's about alternative energy, mechanical parts that can communicate the slightest and earliest of issues before they develop into serious problems, medical innovations, 3D printing, and environmental friendly machinery to replace legacy technologies. We get it, her mom is amazing and she works at an amazing company that is doing wonderful things for us.

The latest GE TV commercial is simply a refreshed effort of a long-lasting branding campaign. Do you remember the company's iconic advertising campaign that ran into the '70s, "GE, We Bring Good Things to Life?" I bet you do. Instead of noticing the superficial differences in the dress of the actors or the way of life between the ages of then and now, note the similarities of the ads. In its day and age, GE's old message really was saying the same thing today's message is conveying.

And the message is:

We're GE, and we are an innovative technology company that improves life for humanity in amazing ways.

It's strong brand building. But why does GE, an iconic American company with an already unforgettable brand, work so hard at it? Some of it must have to do with the diversity of the company's efforts, and tying them all together to make America realize the company makes more than appliances. But I'm not as concerned with how America sees GE, versus how the investment community looks at the company and then values its stock. Don't get me wrong, I care about GE's image with America, but this article is about how its communication supports its stock.

Two words in the sentence I have highlighted above seem to run through the entirety of the company's commercial. They are "innovative" and "technology." GE has ensured that we know it makes very cool things and that the company is at the forefront of innovation. Its website, its YouTube channel and its televised media all convey this fact. At least partly because of what it does, first and foremost, and how effectively it communicates secondarily, we value it higher than its peers.

Stock

P/E

P/E/G

P/B

P/S

EV/EBITDA

General Electric

20.2

1.8

1.9

1.7

21.6

Whirlpool (NYSE:WHR)

14.2

0.6

2.3

0.6

6.2

United Technologies (NYSE:UTX)

18.5

1.5

3.3

1.7

10.8

Caterpillar (NYSE:CAT)

16.9

1.2

2.9

1.1

10.8

Illinois Tool Works (NYSE:ITW)

21.7

2.0

3.6

2.4

12.2

Comparing the conglomerate GE to its peers in industrial equipment and with one appliance maker, Whirlpool, we see that on a valuation basis it is priced atop most of its peers on almost all metrics. Obviously, GE's valuation is going to exceed Whirlpool at most points in time, save perhaps during a housing super-boom. But as you peruse the tables that follow this first table here, ask yourself if GE deserves a bigger valuation than WHR today. On the numbers purely, I'm not sure the answer is yes.

Only Illinois Tool Works exceeds GE on a valuation basis, though after some inspection, that appears to me to be an example of an extended valuation. Perhaps I'll produce some research on ITW separately, but I can say I've noted a deterioration of operating results and expectations and a slowing of growth along with a stalling stock price at ITW.

It is unfair to compare GE to most of these companies because of its operational reach, but that attests to GE's strategic prowess and operational execution really. To be able to perform operationally with so much going on, and to attract a rich valuation at the same time, says a lot about the success of the company's efforts. Take note, though, that if it were to slip up, calls would go out immediately on Wall Street for the breakup of the company.

Stock

5-Yr Projected Growth

Next Yr Proj. Gr.

Div. Yield

General Electric

8.5%

6.5%

3.4%

Whirlpool

21%

16%

1.7%

United Technologies

11%

11%

2.1%

Caterpillar

13.5%

16%

2.5%

Illinois Tool Works

9.1%

15%

3.7%

Looking at the table above, we could argue that GE is not the best value among the group. GE offers a steady and strong dividend yield, though, and one an investor can rely on. But the EPS growth projection for the stock is the lowest for the current year and for the next five years. Granted, it's a huge ship to move and the company generates spectacular cash flow and returns on investment.

Stock

ROE

ROA

General Electric

11.7%

1.6%

Whirlpool

18.1%

5.9%

United Technologies

20%

6.5%

Caterpillar

19.8%

4.0%

Illinois Tool Works

16.1%

8.0%

However, even on a returns scale, GE measures short of this group. So, is GE really worth the premium it attains? Well, if you believe in the company's message and that it can produce some serious disruption in major industries in the years ahead then maybe the answer is yes. Therefore, its innovative efforts in disruptive technology and its effective communication of those efforts is helping to boost demand for the shares above where the stock might trade on a purely quantitative perspective.

But there's more to GE's brand value than the innovation and technology aspect. It's seen by most Americans as a reliable American company that is unlikely to ever hinge on the fringe of disaster, like other American icons of late (think General Motors (NYSE:GM)). So when seniors and other conservative investors are determining what to hold in portfolios, GE comes to mind for them and their advisers. The same goes for institutional investors who have to show their holdings to investors regularly.

Is this a determination that GE is overpriced?

No, it's not, because the value of a stock is determined by supply and demand for it. The communication efforts of this company are therefore value added, because they sure seem to help to increase demand for the shares. I think I have shown that in the comparisons of the numbers. Kudos go out to the company for its successful value-added communications, which for shareholders are enhancing to their returns.

Source: How GE's TV Commercial Supports Its Stock Price