I have been a longtime follower of both General Electric (NYSE:GE) and Siemens (SI) on my daily stock watch list. Recently I have been giving some serious thought to buying one of these companies to begin building a position within my portfolio. There are obvious differences in these two companies, but there are also a lot of similarities.
When it comes to putting up my own capital to acquire one of these stocks, I (like most) would like to buy the stock that is the better deal of the two. In addition to examining price, I also like to do a comparison of each firm's core fundamentals as well as their future growth prospects, and how they might impact future price movement. So to do that, let's examine each one of these firms and try to decide which one is the better deal.
GE is a massive company that is involved in numerous areas of the global economy. These include electricity development/generation, financial services, aircraft engineering, water processing, household appliance, consumer goods, and television networking. GE has customers in more than 100 different countries, which allows the company to not only have diversification in their product line, but also in their customer base. GE has a market capitalization of $201.5 billion and a respectable PE of 15.55. The stock currently trades for around $18.75/share, which is near the top end of their current 52 week high of $21/share. GE's stock in 2008 took a big hit during the financial crisis due their exposure to the credit default swap market in their financial arm of the business.
The stock which had traded in the $40/share range dropped to a low of $7/share by the beginning of 2009. The company at the time also decreased their dividend from $1.24/share to $0.40/share. This is never a good sign, but like a lot companies GE was able to come out of the financial crisis a stronger, better ran company. In 2008 GE had $48.18 billion in cash on their balance sheet; today they have $83.65 billion. GE's stock since then does not have the same volatility, but the stock has steadily came back from the signal digits and their dividend continues to increase each year. The stock continues to inch higher each quarter as GE continues to improve their bottom line and create a stronger core business.
This past quarter GE posted earnings that were slightly above what the street had expected, but saw overall revenue fall 8% from the year prior to $35.2 billion. The highlight for this past quarter's earnings was that their revenue from their industrial arm of the business grew by almost 14%. The company's CEO stated that this past quarter's industrial growth was the strongest GE has seen since the financial crisis 4 years ago. He also reaffirmed that the company is still on pace for the year for double digit growth.
SI is another massive company that is involved in electronics, electrical engineering, electricity development/generation, equity investments, IT solutions/services, and healthcare. SI has a market capitalization of $76.7 Billion and an attractive PE of 13.60. The stock currently trades for around $86.00/share. Unlike GE, SI's stock is trading near its 52 week low of $84.86. SI's perpetual decline over the past 6 months has been mainly attributed to one main thing, Europe.
SI is based in Germany, and like most European companies has been dragged down because of their presumed high exposure to the region and, of course, the big unknown, the fate of the EU. I will be the first to agree that the European situation has not helped overall demand in the region, but SI is a global company like GE, and not only has diversification in their businesses around the world, but also in their customer base. GE has exposure to Europe too, but has not experienced the same decline that SI has.
This past quarter was not the best quarter for the SI, but it was far from their worst. SI's revenue for the quarter rose 9%, but unfortunately their order intake declined by almost 13%. One major bright side that was highlighted in the past quarter was high number sales in the U.S., which were up by 18%. SI's CEO stated that demand in the U.S. has been strong both from a sales standpoint and from overall market growth.
One of the areas where SI has a great deal of exposure and is something that sets it apart from GE is in their healthcare business. One of SI's larger known products in the healthcare sector is their hospital health information systems. These systems (known as HIS) are the main database for hospitals when it comes to scheduling, registering, and billing patients. As healthcare continue to grow and evolve both here in the US and abroad these systems will continually need to be updated and upgraded to keep up with the ever growing amounts of data and patient sensitive information that is needed to be kept on them. SI continues to be one of the main distributors for this type of technology.
Looking at the chart below, the first thing that jumps off the page to me is the sheer size difference in these two firms. GE's market cap is 2.5 times larger than that of SI, yet both employ a similar number of employees. That usually to me means a few things - either GE has better margins than SI, which they don't (by enough to make that big of a difference), or GE has better utilization of their staff. I am of the school of thought that the latter is indeed the case.
SI, on the other hand, may not have the same efficiencies of their competitor, but their overall value and return on equity outshines that of GE. Since SI is currently trading toward the lower end of their 52 week range, the overall value that the stock presents is extremely attractive. In addition to this, their return on equity for 2011 was 22.83%, compared to GE's 11.06%. Both companies have similar betas, which is good from a volatility standpoint. The dividend yield between the two firms is also another thing that sets the two apart. GE currently yields around 3.57%, while SI is yielding 4.45%.
It is important to mention that, since SI is a German company, the yield that you receive will be subject to German dividend tax of 26.4%. So the effective rate received would be closer to 3.2%, which is important if you trading out of a tax deferred account (IRA). If you are trading on a taxable margin account you can claim a credit on your annual tax statement for this amount. Since the German amount currently exceeds the US dividend tax amount the credit is only good up to 15%, but that is better than nothing.
|2011 Net Income (Millions)||$14,151||$6,145|
|Q1 2012 Net Income (Millions)||$3,034||$1,439|
|Market Capitalization||$201.5 B||$76.73 B|
|2011 Net Income/Employee||$47,013||$16,928|
|Return on Equity||11.06%||22.83%|
Lastly, I think it is important to mention that neither SI or GE are fast growing companies that are going to make large daily leaps and bounds in stock price. Instead they are steady and consistent companies that improve over time. If you are the type of investor that is looking for that type of growth, I would not suggest SI or GE, but instead would point you to higher-beta names like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), or Chipotle (NYSE:CMG).
After examining the pros/cons of both GE and SI, I believe that for the true value investor out there and the potential for greater returns due to the stock being undervalued relative to its peers, I would prefer to buy SI. That isn't to say that GE is not a great company, because it is - and more than likely will continue to be. From a valuation standpoint, and after examining the current oversold situation that SI is in, I find SI to be the more enticing investment.
Disclosure: I am long SI.