Since 2009 General Electric (GE) has been trying to recover its profitability to pre-crisis levels, but the market cap is still around $100B less than it was from 2003 to 2007, so, does the company finally deserves that $300B market cap again?
Back in 2004, GE delivered earnings per share of $1,61 and the market was paying more than 20 times earnings to own a piece of the company. Revenue was more or less at current values, but the company managed be more profitable back then.
Someone who invested in 2004 was paying more that $30 per share to get that $1,61, a value that represented a return of less that 5.5% and compares to a return of 6.8% currently, even if you assume last year's EPS of $1,37 (a value that the company expects to grow by double-digit in 2012) and a share price of $20. By this, it's clear that the market view of the company assumed more growth perspectives back then than now, something that may be about to change.
In last quarter's results, the company announced its strongest orders quarter in history, at $200B, and continued to increase its EPS since 2009, confirming that it is recovering its profitability and that it still has room to grow. Other positive developments, apart from the dividend increase that always helps to attract income investors, were that the company is finally expecting GE Capital to restart its dividend to the parent company, and that it continued with the stock buyback program, meaning that there are positive forces working both the E and S of EPS.
| 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | |
| Revenue (millions) | $142237 | $148442 | $154272 | $180929 | $169469 | $149689 |
| Operating Income (millions) | $15697 | $13961 | $9816 | $19289 | $25565 | $23077 |
| Net Income (millions) | $14151 | $11644 | $11025 | $17410 | $22208 | $20742 |
| EPS | $1.37 | $1.14 | $1.21 | $1.93 | $2.2 | $1.86 |
| Dividends per share | $0.61 | $0.46 | $0.61 | $1.24 | $1.15 | $1.03 |
| Book value per share | $11.01 | $11.2 | $11 | $9.93 | $11.57 | $10.85 |
Source: Bloomberg
If you invest at current prices and the company continues to move to historical valuations and profitability, you should expect an initial return of more than 7.5% on your investment (assuming 2012 expected EPS of 1,54 and a purchasing share price of 20).
| 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | |
| Average Price Earnings Ratio | 15.89 | 13.66 | 6.94 | 12.72 | 20.32 | 19.51 |
| Average Price Book Ratio | 1.62 | 1.5 | 1.34 | 2.42 | 3.48 | 3.29 |
Also, if market valuations return to pre-crisis levels, we should expect a PER above 18 and a Price/Book at around 3, ratios that would imply a share price of $27.72 (1,54*18) on the first case, and $33 in the second. While $33 per share would be exaggerated over the short-term, given that it would represent a return of 4.6% (1.54/33) and a PER of 21 in an uncertain global economic environment, a current higher market valuation can still be justified given the growth potential to the EPS that the company continues to have, both through the expected increase in net income and continued share buybacks that will continue to increase the profitability of the shareholders in the long term.
So, while I believe that there is still upside left for GE's share price, a market cap of $300B should not be expected before net income reaches $20B. Even so, this could be an interesting entry point for the medium- to long-term investor who would ultimately benefit from continued improvement of net income and the share buyback programs.
