Conglomerates are usually not of much interest to me. They oftentimes seem too difficult to steer and operate in different, unrelated businesses with little potential for synergies and efficiencies. In fact, I do believe that shareholders can more easily and (cost-)efficiently diversify their wealth than conglomerates can. Since both companies below have very strong market positions in at least their core segments (healthcare, engineering/industrials, technology, appliances and financial services) and have share values significantly lower than their intrinsic values, I rate both companies "Strong Buy" with significant upside potential as they are likely to take the full swing of the economic recovery.
General Electric (GE) is a US-based conglomerate with a business focus on almost everything a company could ever produce. GE offers products and services for turbines, engines, generators, water treatment solutions, electrical and drilling equipments and is active from the healthcare sector to aerospace and financial services. GE is such a diversified company, it actually can be seen as a market proxy or a proxy of how well America is doing in general. GE was founded in 1892, has a track record of innovation, growth and profitability and could be considered a core holding in the US equity investment space.
GE has a market cap of $212 billion and is one of the largest companies in the world. I like E's footprint and strength of innovation that allows GE to produce and ship its products to all corners of the world. I am also convinced of GE's engineering capabilities which leads to attractive margins. In addition, I value the financial services and healthcare exposure. Despite being active in various sectors, GE still achieved a respectable return on equity of 10.6% last year. Investors who bet on a strengthening America could do very well with General Electric on a long-term basis.
GE's forward P/E is around 11.3x, which I judge generally to be too low for this globally operating icon. Investors can also collect a dividend yield of 3.4%.
I estimate GE to achieve a 2013 EPS of $1.82 per share, which is in the range of lowest and highest analyst EPS estimates for 2013. With a premium multiple of 17, the company's intrinsic value is close to $31 a share, which is about 55% from current share value of $20.
GE is particularly attractive for risk-conscious investors who desire a exposure to large cap US equities with medium volatility.
Siemens (SI) is a Germany-based electronics and electrical engineering firm founded in 1847. SI, whose ADR's trade in the US, operates six segments: Healthcare, Industrial/Engineering, Financial, IT, Energy and Investments. Similar to GE, SI is a large conglomerate and has a market cap of $75 billion. Since being smaller than the big competitor in the US, the company seems to be overlooked by investors outside Germany.
Operating in a variety of sectors, the company is well-known for its branded appliances and engineering ability (from trains to nuclear reactors) throughout the world. Also, the company does work very profitably for investors with a return on equity of almost 14% and a fairly decent dividend yield of 4.6%. The stock has come way down from its 52 week high of $138.46 and only has a forward P/E of 9.25 making SI comparatively cheaper than GE.
I estimate SI to earn $8.66 in 2013. Applying the same GE multiple of 17, the intrinsic value of the stock is about $147. Currently trading at only $85, SI has an upside of 73%.
SI has come down materially throughout the last year as a result of increased investor fear about global growth prospects. As I have said repeatedly in my other posts, the time to invest in stocks is now. Investors, who are looking for a large, well-capitalized, engineering giant outside the US with exposure to a variety of sectors and a very decent dividend, should consider SI.