GE Worth a Look on Energy Unit Ramp Up

General Electric (GE) stock has underperformed versus the Dow and the S&P 500 over the last five years, but it is now showing signs of improvement. GE is making the effort to further diversify as its Energy Financial Services unit has plans to invest more than 5 times its normal 3 year investment in overseas development, some $5 billion. This is a wise move for the already multifaceted company that sells a wide range of products from appliances to ultrasound equipment. However, the significant news of today is all about their energy infrastructure sales in emerging markets in Asia, Latin America, and the Middle East.

Emerging markets such as these have been growing quite rapidly and their infrastructure spending simply has not kept pace. The Asian Development Bank estimates that there is a need in the next 10 years for over $3 trillion in roads, energy projects, ports, and sanitation. Current investment trends suggest that infrastructure investment could fall short of that estimate by half. Energy infrastructure expenditures in emerging markets is one way that GE is hoping to offset weakness from domestic sales as the U.S. economy continues to slow. Thus, GE is jumping at the opportunity to assist emerging economies mostly with energy and water projects.

However, GE is also at the forefront of the rapidly growing wind power industry, as evidenced by a $1 billion deal to build a wind turbine in the United States, its second such contract in recent months. Out of all U.S. energy producing projects completed during 2007, wind power accounted for about 30%.

General Electric is trending towards a more global business model, as last year was the first year in GE’s history in which more than half of their revenue was from sales outside of the U.S. The ramp up of GE’s Energy unit to focus on emerging markets is just one of the ways that GE is working globally.

Since U.S. consumer sentiment is weak, it appears that this strategy shift could not have come at a better time. We have little reason to question the prudence of GE management in making such a leap. Management also achieved a fairly high 19.2% return-on-equity [ROE] at last reporting. Based on the Ockham Research methodology, we believe that GE’s price-to-sales is about a third lower than we would normally expect given historical ranges. Furthermore, we would expect to see price-to-cash flow in the range of 12.1 to 16.3, but this valuation metric is also fairly low at only 9.2 times. As such, patient investors should consider purchasing GE shares in the low thirties.

Disclosure: None

Comments

[moneygardener]

I agree and I have been watching GE at these levels to add to my position.