by Daniel Carver
Several positive catalysts are in play surrounding General Electric (GE) that put the stock on my radar now.
General Electric generates some 27% of its revenue in Europe, making the announcement by the eurozone finance ministers to lend Spain's troubled banks up to 100 billion euros ($125 billion) a plus for the company's revenue prospects. Another positive catalyst for General Electric arrived in the form of U.S. foreign policy. Treasury Secretary Geithner will arrive in India in late June to continue discussions of closer financial and economic ties with India. That bodes well for a number of U.S. companies and General Electric is not the least among them. India is one of the few industrialized nations still open to the concept of developing nuclear power and General Electric's infrastructure segment could profit big-time from an improved relationship.
General Electric also recently committed to a significant investment in India, lending credence to General Electric's commitment to grow its business in this lucrative emerging economy. With the U.S. economy growing at a snail's pace and the uncertainty in Europe, it is my belief that General Electric is in a good macroeconomic position to achieve organic revenue and earnings growth. Its strategies in India and Germany should improve operating and profit margins. General Electric's focus on emerging Asian markets is the right play at the right moment in time. The stock is undervalued from a discounted cash flow perspective by roughly 33% and has nowhere to go but up. When you factor in the dividend I think you will agree there is little downside risk to this equity.
Koninklijke Philips Electronics NV (PHG) competes with General Electric in the healthcare and, to a lesser degree, the home and business solutions segments. Philips has a market cap of almost $17 billion and trades at about $18 per share. Philips posted a negative net income for 2011 resulting in the absence of a price to earnings ratio and placing the price to earnings growth ratio in negative territory at -4.16. Philips has a price to book of 1.11 and predictably a negative return on equity of -5.48%.
Quarterly year-over-year revenue and earnings growth are reported at 6.70% and -1.53%, respectively. The debt to equity ratio is an acceptable 40.79 and the current ratio is equally acceptable at 1.40. The stock pays a dividend yielding 5.50% and the payout ratio is not given as a result of negative net income per share. Philips competes effectively with General Electric's Healthcare segment as this article illustrates. Philips also pressures General Electric's Home and Business Solutions segment. Philips recently announced a revolutionary advance in LED's that has the potential to provide Philips a real competitive advantage in General Electric's home and business segment. That said, Philip's comparative footprint is too small to be any serious threat to General Electric in the broader sense.
Siemens AG (SI) closely mirrors General Electric, competing directly and indirectly (through investments) across four of General Electric's segments of operation. Siemens has a market capitalization of around $71 billion and trades at about $81 per share. It has a price to earnings ratio of 14.08, a price to earnings growth ratio of 0.27 and a price to book of 1.82. Siemens return on equity is 13.83% and quarterly year-over-year revenue and earnings growth are 8.90% and -64.9%, respectively. Debt to equity is reported at 60.76 and the firm's current ratio is 1.21. Siemens pays shareholders a dividend yielding 4.9% against a payout ratio of 52%. Siemens is a major competitor with General Electric's infrastructure segment. I am of the opinion General Electric's commitment to acquire a medium sized German business will serve to mitigate Siemen's inherent competitive edge in Europe.
In order to get a better picture of General Electric's position within the financial sector, I will include Citigroup (C) into this discussion. Citigroup competes with General Electric's General Electric Capital segment. Citigroup has a market cap of around $78 billion and trades at $26 per share. It sports an excellent price to earnings ratio of 7.37, a price to earnings growth ratio of 0.70 and a fractional price to book of 0.45. Return on equity is 6.24% with quarterly year-over-year revenue and earnings growth both languish in negative territory at -1.5% and -2.3%, respectively.
Bank accounting rules preclude the availability of a debt to equity and current ratio. Citigroup pays shareholders a tiny dividend yielding 0.1% against a payout ratio of 1%. Citigroup has a net funded exposure in Europe of $7.7 billion, down about 50% from so-called funded exposure disclosed less than a year ago in this Bloomberg article. These unfunded exposures are not getting much ink, but are perhaps the most worrisome. While Citigroup may operate in competition with General Electric's Global Credit segment, I suspect General Electric's clientele are akin to the new car buyer who allows the dealership to arrange the financing. I don't think there is much overlap in the customer base. As a result, Citigroup is not a de facto competitor.
Of the four companies here, Siemens is the most undervalued from a discounted cash flow perspective (130.85%), followed by General Electric (33.25%). Siemens is the most likely to benefit from continued problems in the European Union as a weak euro will enhance sales opportunities abroad. Despite the eurozone finance minister's recent announcement, I believe the troubles in Europe will continue for quite some time and dampen General Electric's overall profitability. Even though General Electric is undervalued, I anticipate Siemens and Philips will outperform General Electric. I recommend waiting for a more definitive direction for Europe to emerge before investing in General Electric.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.