General Electric (GE) has been in the news mostly for not paying income taxes, but investors should be focusing on how the company is currently undervalued. Despite its stock price declining by over 50 percent since Jack Welch retired as CEO in 2001, the company is due to improve earnings in coming years from its investments in innovation and the developing world. In this article, I justify that General Electric is undervalued and the price of GE stock will continue to increase in coming months.
It is very difficult to value GE on past earnings since the company is very segmented and Jeff Immelt has sold a large chunk of the company in order to focus on core competencies. With revenue of about $150 billion per year, the company still has the ability to save money from cost synergies and gain revenue by leveraging its wide array of products and services. Its revenue is expected to stay constant over the next couple of years, but General Electric is expected to substantially improve its bottom line. GE's EPS is expected to increase from $1.12 in 2010 to $1.57 in 2012. With many companies in the market aiming for increased revenue at the cost of profitability (see retail and consumer electronics except for Apple (AAPL)), I am a firm believer that increasing margins is the best way to add long term shareholder value.
General Electric has had six straight quarters of double digit operating earnings growth and an increased dividend from 10 cents to 15 cents during this time. Despite this rapid growth and improved dividend, shares have dropped by about 14 percent from April 21st 2010 to October 21st 2011, underperforming the market by more than 17.5 percent. The company has a lower P/E ratio (13.45) than almost all of its major competitors including United Technologies (UTX) (14.69) and Caterpillar (CAT) (14.52). According to analysts, the stock has a 1 year price target of $20.71. My personal valuation techniques price GE at around $24. At a price of $16.39 at the close of November 7th, now is a good time to go long on GE for a cheap price.