General Electric, (GE), the only Dow Component that has been on the list since the creation of the Dow Jones Industrial Index, is tenaciously undervalued. I believe that GE is undervalued due to 8 factors:
- Lingering pessimism over the stability and profitability of GE due to GE Capital: GE has been able to refinance much of its debt. GE Capital definitely has weighed the company down, but Q2 numbers could prove to be a bright spot and provide some momentum to break the mind set that GE Capital is representative of GE. Provided that there are no additional European defaults, debt can be refinanced relatively easily because of GE’s high credit rating and multi-stream revenue generating capabilities. GE still maintains an AA+ credit rating (higher than most countries) and has continued to pay a dividend through the recession, two indicators of the company’s relative strength despite the negative GE Capital talk.
- Making the right corporate structure moves: GE cut underperforming subs/components of GE and used the proceeds to pay down some debt and make the company more manageable. Notable moves were GE cutting loose a unit that produced benzene netting the company a couple billion. GE has sold/is in the process of selling its majority ownership stake in NBC to Comcast (CMCSA).
- Failure to price in GE’s future potential in the green energy movement: Yes, GE makes light bulbs and has been a notorious hold out on compact fluorescents lights. GE was a hold out on the compact fluorescents because they had their eye on picking up CREE (CREE) as an acquisition. But the real area that has to be understood to see the real value in GE is that GE is one of the top wind turbine producers in the world (second only possibly to Vestas) and GE Energy is the largest US domestic wind turbine producer. As wind power farms expand and as zoning laws and residential preference lose weight against the growing need for clean energy GE is a company that is in an excellent position to profit from their bread and butter business of making turbines and generators.
- Failure to take an appropriate long term view of GE’s potential in the rebuilding of America’s infrastructure: For the past three decades America’s infrastructure has been largely ignored in politics and each administration seeks to be remembered for cutting the deficit or allowing it to expand at a lower rate. The time has come to address the crumbling infrastructure of the U.S.A. as a necessity, as a way to create jobs and as a way to remain competitive in the world economy. The company’s name says it all, General Electric. GE as stated above is a turbine and industrial generator producer. But the company is also becoming involved in smart grid technology. Before the shift to green energy can occur there will be a strong and long twilight period where smart grid technology will be required to work with clean coal turbines to keep the electric grid stable and to keep air conditioners humming away. GE will have a large hand in creating this new grid. GE can assist in laying new and required cables and providing the large scale know-how. GE has the innovative spirit and history to be a part of this reinvigoration of the American power grid. Turbine sales will go up, generator sales will go up and smart grid technologies will be in higher demand.
- Failure to understand the impact of the new health care bill on GE: GE is also a medical device maker. Some of the most sophisticated ultrasound devices, MRI’s, CAT scan and PET scan devices are produces by GE. As preventative care becomes the focal point of the reform bill more people will have insurance and access to the scans to focus on early detection of potentially life threatening diseases or diseases with long durational periods and high associated costs. As well, GE has been at the forefront of trying to find a safe, secure and efficient way to move over to electronic medical records. Other contenders in this field that could be potential acquisition targets/pipeline enhancers for GE in this area are Athena Health, (ATHN) and Nuance, (NUAN). Athena Health specifically focuses on a web based solution for patient records and billings. Nuance is using its speech recognition software to make an electronic medical record where the doctor does not have to write anything down (adios Doctor’s chicken scratch and the associated medical errors).
- GE Shorting herd mentality: The short sellers out there believe that they smell blood in the water. The increase in short positions have made others wary but the shorts are going to get slammed on this one. The shorts are looking only at item one on this list, GE Capital and they are ignoring all the other items. While GE has a huge financial arm it is still not a Bank of America or Citi. Finance is an avenue to revenues for the company but it is not the only one way street in the town like BAC or C. Look for the shorts seeking cover. While growth may have slowed, the U.S. and China are still growing and that means GE will be growing. Note, the IMF recently raised its opinion of the prospect that the world economy is coming out of the recession.
- Jack Welch Fanboys and negative Immelt sentiment: It seems every time I go to any financial site and GE is discussed the Jack Welch Fanboys come out of the wood work. I have seen Immelt speak a few times and he knows what he is doing with GE and he has good long term vision. Jack Welch left GE with a stunning amount of hidden problems. One that really irks me is the stone walling that Welch engaged in when dealing with the EPA. GE, under Immelt finally started working with the EPA and engaged in good corporate governance and paid huge penalties for the externalities of GE’s production and past success. Good corporate governance is good for America in the long term. That was one example that bothers me when people speak of Welch like Jesus. Little piece of advice for the Welch Fanboys, it is easy to look like a winner in a game if you constantly cheat and are not called out by the referee, but history has the benefit of the challenge flag and instant replay. All of the “gains” under Welch will be seen as old corporate America smoke, mirrors and fuzzy math that focuses on short term prospects as opposed to the long term investment in the GE company and America. Immelt has the long term view for GE and it’s role in the global economy.
- GE beat earnings the past 5 quarters: 5 quarters of beating earnings expectations is a weak indicator but an indicator nonetheless that the company is generating revenues and is in a growth cycle. I discuss this point last however because one can argue that if the company continues to set a low bar and continually reiterates a mediocre outlook then beating market expectations is an easy trick to use to pump up how attractive a stock looks. It is my opinion though that based on the above factors that GE beating earnings is the real deal.
If you fear a double dip recession then do not buy GE. If there is a double dip recession then GE will essentially get a smack in the face in the short term. If you want to be cagey about the play then stay tuned for 7/16 as that is the next expected earnings announcement, engage in the wait and see game and play safe. Even if GE is positive and the stock rises I believe it is still undervalued enough that it will be a good pick up for a buy and hold portfolio. If you like what I say then get gutsy and pull the trigger before earnings.
Disclosure: Long GE, Long C