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General Electric (GE) is a diversified conglomerate that operates as in technology infrastructure, energy infrastructure, home and business solutions, and financial services segments. The company headquartered in Fairfield, Connecticut, employs more than 280,000 employees worldwide.

As of October 12, General Electric stock was trading at $16.14 with a 52-week range of $14.02 – $21.65. It has a market cap of $171.1 billion. Trailing twelve month P/E ratio is 12.2, and forward P/E ratio is 10.3. P/B, P/S, and P/CF ratios stand at 1.3, 1.1, and 4.9, respectively. The 3-year annualized revenue and EPS growth stand at -4.5% and -19.5%, respectively. Operating margin is 12.7%, and net profit margin is 8.9%. The company has a pretty high debt-to-equity ratio of 2.2. However, General Electric is a nifty dividend payer with a projected yield of 3.7%.

General Electric has 5-star rating from Morningstar. While its trailing P/E ratio is 12.2, it has a 5-year average P/E ratio of 15. Out of 16 analysts covering the company, 11 have buy, 1 has outperform, and 4 have hold ratings. Wall Street has diverse opinions on General Electric’s future. The bottom line is -8.8% growth, whereas the top-line growth estimate is 31.4% for the next year. Average five-year annualized growth forecast estimate is 11.7%.

What is the fair value of General Electric given the forecast estimates? We can estimate General Electric’s fair value using discounted earnings plus equity model as follows.

Discounted Earnings Plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.

Valuation

Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.

Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $1.54 along with the mean estimate of $1.41 for the next year.

E0 = EPS = ($1.29 + $1.60) / 2 = $1.48

Wall Street holds diversified opinions on the company’s future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 11.70%. Book value per share is $12.08.

The rest is as follows:

Fair Value Estimator

V0

E0

$1.46

V1

E0 (1+g)/(1+r)

$1.46

V2

E0((1+g)/(1+r))2

$1.47

V3

E0((1+g)/(1+r))3

$1.48

V4

E0((1+g)/(1+r))4

$1.49

V5

E0((1+g)/(1+r))5

$1.50

D

E0(1+g)5/[r(1+r)5]

$13.65

BV

Equals

$12.08

Fair Value Range

Lower Boundary

$22.52

Upper Boundary

$34.60

Potential

114.36%

(You can download FED+ Fair Value Estimator, here.)

I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5-year discounted-earnings-plus-book-value model, the fair-value range for General Electric is between $22.52 and $34.60 per share. Since the debt/equity ratio of General Electric is pretty high, I would expect the stock to trade somewhere at the lower end of its fair value range. However, its trading price of $16 is still 40% lower than my lower boundary estimate. Thus, the stock has at least 40% upside potential based on analyst estimates. When we look at the related companies, General Electric looks even cheaper. Here is a comparison of General Electric with selected peer companies.

Peer Comparison

Company

Market Cap

P/S

P/B

P/E

Yield

General Electric

$171 Billion

1.1

1.3

12.2

3.6%

United Technologies (UTX)

$67 Billion

1.2

2.9

14.3

2.4%

3M Company (MMM)

$54.43 Billion

2.0

3.1

13

2.8%

ABB Ltd. (ABB)

$43.28 Billion

1.2

2.7

14.4

3.6%

Emerson Electric (AMR)

$33.80 Billion

1.5

3.1

15.6

3.0%

Praxair Inc. (PX)

$30.80 Billion

2.9

4.8

23.7

1.9%

Danaher Inc. (DHR)

$30.29 Billion

2.2

1.8

15.2

0.2%

Industry

-

1.2

2.0

13.8

2.5%

(Data from Morningstar, and is current as of October 12)


Compared to its peers, General Electric has the highest market cap of $171 billion, lowest P/S ratio of 1.1, lowest P/B ratio of 1.3, lowest P/E ratio of 12.2, and highest yield of 3.6%. All of these ratios are better than the industry average.

  • United Technologies has a trailing P/E ratio of 14.3. With a market cap of $67 billion, the company offers a yield of 2.4%. 52-week trading range is $66.87 - $91.83. The stock has a four-star rating from Morningstar.
  • 3M has a trailing P/E ratio of 13. With a market cap of $54.43 billion, the company offers a yield of 2.8%. 52-week trading range is $48.63 - $98.19. 3M also has a 5-star rating from Morningstar.
  • ABB has a trailing P/E ratio of 14.4. With a market cap of $42.8 billion, the company offers a yield of 3.6%. 52-week trading range is $15.89 - $27.58. ABB has a 4-star rating from Morningstar.
  • Emerson Electric has a trailing P/E ratio of 15.6. With a market cap of $33.80 billion, the company offers a yield of 3.0%. 52-week trading range is $39.50 - $64.56. Emerson Electric has a 4-star rating from Morningstar.
  • Praxair has a trailing P/E ratio of 23.7. With a market cap of $30.80 billion, the company offers a yield of 1.9%. 52-week trading range is $88.60 - $111.74. Praxair has a 3-star rating from Morningstar.
  • Danaher has a trailing P/E ratio of 15.2. With a market cap of $30.29 billion, the company offers a yield of 0.2%. 52-week trading range is $39.34 - $56.09. Danaher also has a 3-star rating from Morningstar.

Summary


General Electric has been one of the most disappointing stocks in the last decade. The stock lost 4.67% annually. The last 5-year performance was even worse. Shareholders experienced annualized losses of 10.89% in the last 5 years. The year-to-date return of -9.35% is also in the negative territory. However, with a trailing P/E ratio of 12.2, and yield of 3.7%, General Electric looks like a better deal than its peers. From a technical perspective, the stock has multiple-bottomed, and ready to bounce back. Deutsche Bank, Barclays, and Oppenheimer also agree with me. Their target prices are $23, $25, and $25, respectively. Mean analyst target price of $21.04 imply almost 30% upside potential.

Source: GE Has Significant Upside Potential