By Robert Gordon
General Electric, Inc. (GE) is, for lack of a better description, a proxy for the American manufacturing economy at large. It has large units involved in everything from sophisticated medical devices, to jet engines, to kitchen appliances. Over half its revenues come from overseas, as GE does business in 100 different countries. GE has seen and been though a lot its history. The company was started in 1890 by Thomas Edison.
GE was trading recently at about $17 per share. Its 52 week range is from $21.45 to $14.02. It has a market capitalization of about $180 billion, and a P/E of 13. It recently raised its dividend to $0.17 per quarter, for an annual yield of 4.0%. It was the fourth dividend increase in past two years.
A brief review of GE's ten year history indicates a far different environment five and ten years ago. In the years immediately before and after the turn of the century, GE was trading over 30 times earnings. And in the years immediately before the recent recession, say 2008, its annual revenue was over $182 billion. Since then, due in part to lack of macro economic growth, and partly due to the GE's sale of a majority stake in NBC to Comcast Inc. (CMCSA), revenues are going to be some 20% below that 2008 high point.
In its third quarter of 2011, GE continued its recent forward momentum. Overall profits, excluding NBC, were up 11% year over year, and profits, again excluding NBC, were $3.4 billion, or $0.31 per share. That figure excludes a 9 cent per share charge from GE's redemption of a preferred stock series held by Berkshire Hathaway Inc. (BRK.B), (BRK.A). The early redemption of the preferred shares will save GE 3 cents per share per year.
Many of GE's businesses are riding high. In the third quarter of the year, the company's financial unit recorded $1.5 billion in profits, up 79% from the year earlier quarter. The transportation unit also had a fine quarter, with profits nearly double year over year. For instance, GE shipped 169 locomotives, versus 99 in the third quarter of 2010. Aircraft order increases in particular help GE, as not only does the company manufacture engines, the finance division also purchases them to lease to airlines.
The weakest part of the company in the third quarter, and more broadly as well, was the energy division. Revenues from the division have been increasing, but profits falling on a year over year basis. GE is the nation's leading wind turbine manufacturer, and domestic wind turbine prices have fallen dramatically, while politicians squabble over energy policy and subsidies, leaving the future of domestic infrastructure for alternative energy unsure. Yet when America gets its act together to support non fossil fuel based energy, GE will be in a great position. GE is already in a great position when it comes to energy programs internationally. It was awarded an $800 million gas and wind turbine project from the Brazilian government in the third quarter, for instance. Overall, GE's vast industrial base experienced a 7% year over year backlog increase, which certainly augers well for 2012 and beyond
Another issue is that GE paid, in 2010, 7.4% of its operating profits in federal tax. In 2001, it paid over 28%. Much has been made of tax reform to ensure that a company that makes the billions that a GE makes is not able to avoid taxes on much of its profit base. With a profit base as large as GE's, every digit percentage change in federal tax rate has significant impact, and I would be surprised if some form of tax law change that would cause GE to pay a higher rate going forward than the 2010 rate
While GE's large finance operation was not placed on the Federal Standards Board of being “too big to fail” there are few finance companies more intertwined with the overall economy than GE Capital. At the close of the 2011 third quarter, it had about $572 in assets, with over 1 million commercial clients, and another 100 million retail clients. It is on schedule to earn a return of about 1.2% on assets for this year, or between $6.5 billion and $7 billion for the full 2011, and its Tier One equity has risen to 11%. I suspect there still are some problem assets hidden deep under the balance sheets, but GE Capital has the strength and earning power to persevere though most anything but a true global meltdown
I am far from alarmist about my own view of GE. It is great company at a historically great price and valuation. Virtually any scenario except a full international meltdown, will find GE at the core of economic growth and development. Be in nuclear energy in America, liquefied natural gas in the Middle East, or the next generation of aircraft engines, GE can design it, build it, sell it, and finance it like no other company in the world.
The many analysts who follow the company give it a mean rating of 1.9, a fairly strong buy. The likes of Warren Buffet (7.7 million shares) and James Barrow (51.6 million shares), both value oriented investors, are on board.
For a short time in 2009, GE stock was selling for under $6 per share. In 2007, GE stock was selling for over $40 per share. Now we see rising earnings, rising dividends, and capital. I see no reason not to buy this “best of breed” company while it still is historically dirt cheap.