Valuation Risk Is Sky-High For General Electric

Jul.17.14 | About: General Electric (GE)


GE trades at 22 times earnings.

But its quarterly growth rate is negative.

And its yearly growth rate is only about 1.4%.

Serious growth concerns exist for General Electric Company (NYSE:GE). The stock trades with a PE multiple of 22, which is well above the multiple of the S&P 500, currently at about 17. That alone makes General Electric look rich, but when you compare that multiple to the growth rate of General Electric, it looks even worse.

Our earnings growth analysis uses trailing 12-month data, calculated on a quarterly basis, to formulate growth trends. The first chart below is a quarterly observation of earnings growth, where we compare the trailing 12-month results from this quarter to last quarter, and then plot the result to develop a quarterly growth trend for earnings. In addition, the second chart compares the same trailing 12-month data to the same period from the year before to calculate the yearly earnings growth for General Electric.

Click to enlarge

Click to enlarge

In both instances, growth concerns are apparent. In the quarterly growth chart, growth has actually turned negative, and in the yearly growth chart, growth is only about 1.4%. When we compare a growth rate as low as that to a PE multiple as high as the one levied on General Electric's stock at this time, concerns skyrocket. General Electric will need to grow much faster to warrant its current multiple.

On a technical basis, General Electric has also tested the longer-term resistance level we have identified for the stock in our real-time trading report for GE. So long as the stock remains under the resistance, we would expect the stock to fall to test longer-term support as that is identified in our report.

Given the valuation risks and the test of longer-term resistance that has recently occurred, our current outlook for GE is negative, and it will remain that way unless resistance breaks higher or a complete decline to longer-term support takes place, as our current report suggests.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H, Kee Jr. for Stock Traders Daily and neither received compensation from the publicly traded companies listed herein for writing this article.