General Electric: Stock Analysis

Jul.23.10 | About: General Electric (GE)

General Electric (NYSE:GE) has been dead money for some time now. The stock is down nearly $40 and down 72.5% over the last 10 years. The company finally reported positive quarterly earnings after two and a half years of declining earnings. The company earned $3.3 billion dollars (30 cents per share) as second quarter earnings increased 15%.

During the most recent conference call, CEO Jeff Immelt noted that: “Equipment orders increased 17%, including 20% growth in the Energy Infrastructure segment and 14% at Technology Infrastructure. Oil & Gas and Healthcare orders were particular bright spots and helped hold total company orders backlog roughly flat, excluding the impact of foreign exchange.”

While it’s great that bottom line growth is improving, GE still came in light on top line growth. Revenue came in at $37.4 billion which is a 4.3% decline. This is a clear indication that some of GE’s positive results were due to cost cutting moves. Growth was positive at every division except for Technology Infrastructure. The highlights were as follows:

  • +93% growth at GE Capital
  • +13% growth at NBC Universal
  • +59% growth at Home & Business Solutions
  • -11% decline at Technology Infrastructure

A major problem area for GE over the past few years has been its GE Capital division. GE Capital is the financial arm of General Electric that provides commercial loans to small and mid sized businesses. GE Capital was adversely affected by the credit bubble bursting over the past few years. The division had $84 billion dollars in real estate alone. Immelt allowed GE Capital to balloon in size in recent years and the division ended up holding over $550 billion dollars in assets. The real estate business has been a difficult area for GE with the company losing $524 million last quarter.

Well, the good news for GE is that the losses at GE Capital appear to be abating. In the 2nd quarter of this year, GE Capital delivered a 93% increase in net income earning $700 million dollars. The company believes that the worst is over for its financing arm. GE Capital grew so large that it put the entire GE franchise at risk so the company is slowly selling off assets to reduce its size.

GE may have a huge debt load but the company is well capitalized. GE reported over $74 billion dollars in cash and cash equivalents. The firm generated $6.3 billion in free cash flow last quarter. This is a 10% decline from last year’s $7 billion dollar intake. GE is still awaiting regulatory approval of its $13.75 billion dollar deal to sell 51% of NBC Universal to Comcast.

Healthcare and oil and gas segments performed particularly well. An industrial rebound would be a major boost to General Electric’s dormant stock price. GE’s industrial and manufacturing businesses and financing arm would be major beneficiaries of any uptick in industrial production.

Earnings are projected at $1.30 for 2011 and $1.60 for 2012. This puts a P/E of 11.4 for 2011 and 9.3 for 2012. Shares trade at 1.4 times book value. The total expected return is 13.45% with earnings expected to grow at 10.75% and a dividend of 2.7%. Management expects to increase the dividend payout next year. GE is no longer the safe buy and hold forever company that it once was. The stock has a standard deviation of approximately 25%.

At under $15 per share, GE is an attractive company due to the large future cash flows, earnings potential, and the expected dividend hike.

Disclosure: I do own shares of GE.