General Electric Co. (GE), the prominent consumer appliances, financial services, media, medical equipment, transportation and commercial conglomerate, has seen a great deal of skepticism in recent weeks regarding the future performance of its equity shares. Here's my take on why all the bearish commentary on GE is misplaced.
A worldwide financial services and technology company of GE's stature trading at near $18.50 levels - seen last in January and then March - raises eyebrows, given the stock's performance over the past two years. My DCF valuation yields an implied price per share for General Electric of $22.53, with moderately conservative assumptions regarding terminal growth and weighted average cost of capital calculations. With a dividend yield of 3.5%, relatively predictable share prices (beta 1.6), and higher-than-average revenue growth, GE is an attractive company for a wide range of potential investors.
Looking at some financial data, revenue growth in Q1 2012 stood at 1.8%, a healthy increase from last year's -3.1% rate and GE's 3-year CAGR of -7.1%. Though net income decreased by a little more than 11% in the first quarter of this year, GE's 12-month net income growth stood at an impressive 4.72%. In terms of return on equity, GE comes to the table with solid stats. Looking at RoE percentage growth values from the first quarters of 2010, 2011, and 2012, respectively, we see rates of 9%, 10.78%, and 10.84%. This fantastic return on equity, compounded with the firm's revenue growth numbers and its expanding profit margins, point to great growth potential for future years. In fact, GE's gross profit margin is one of the highest in the industry, at a whopping 53.8%. Net profit margin of 8.8% is still higher than the industry average, indicating experienced management.
Financial metrics from GE's primary competitors in the industrial conglomerates industry are not comparable to this longstanding blue-chip firm. GE, for one, has demonstrated a particularly refined ability to adapt to market pressures and rising raw materials costs that has put it ahead of its peers. United Technologies (UTX), 3M (MMM), Siemens AG (SI), Emerson Electric (EMR), Textron (TXT), Danaher Corp (DHR), Tyco (TYC), Powin Corp. (PWON.OB), Raven Industries (RAVN), and others are in the same category, yet fail to display comparable levels of innovation and competency on the part of management as does General Electric.
Late last month, CEO and Chairman Jeff Immelt gave a very upbeat presentation to shareholders that emphasized the firm's strong growth outlook for future quarters. Specific takeaways from his discussion: profit growth projections in GE's healthcare operations are better due to higher growth in sales outside of Europe; higher market share in aviation operations is expected over the next 10 years; the firm will have over $100 billion in capital to position over the next four years for mergers/acquisitions activity and share buybacks. All of these substantiate the bullish growth arguments suggested by the more fundamental measures of company position.
Thus, future growth prospects for this first-rate company are profoundly compelling. Current valuation metrics put GE shares at a very positive place for investors looking to buy this week. For all these reasons, I'm bullish on GE, and may move into some long stock/options plays this week. Investors who like options may consider covered call/synthetic long positions, or else naked or cash-secured put plays - the possibilities are endless for this first-class equity.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE over the next 72 hours.