by James Brooks
Over recent years, there has been growing concern about the unsustainable ways in which we produce electricity, and a corresponding increase in the use of renewable resources in the production and distribution of electricity. So in this context, how is the stock price of General Electric Company (GE) performing? And how is it faring in relation to other companies in the industry?
General Electric currently has a price-to-earnings ratio around 16.5, which is a very similar situation to this time last year, when figures were 16.6. The stock is currently trading at around $20, after enjoying a relatively stable performance over the past six months with fluctuations from 18 dollars to 20.2 dollars.
If you look across the sector as a whole, the correlations noted are interesting - Honeywell International (HON) is in a very similar position; not only is the current price-to-earnings ratio slightly lower than the five-year average (21.7 compared to 23.9,) but the multiples were lower six months ago, when P/E was 14.0. This suggests the industry is currently in the midst of a lull period - one unlikely to last given today's unstable economic climate. General Electric will have to carefully avoid complacency to maintain its healthy market position.
One significant factor that could soon influence General Electric's stock price dramatically is its plans to buy a (currently unknown) medium-sized German business by the end of the year, in order to expand and develop its global presence. Taking an organic approach to acquisitions, the company was unwilling to share details about such plans, but did share its preference for acquiring family-owned businesses rather than those already listed on the stock market. I think this is a strong show of long-term strategy by General Electric; it is seeking out companies with the potential to grow in real terms, rather than those relying on the fickle financial markets for expansion opportunities.
Although taking on such a company will, of course, have a significant risk factor, I think if the acquisition successfully takes place the impact on the company's stock price will be overwhelmingly positive. Given the current economic climate, many companies are undervalued, meaning there is the potential for big gains by General Electric if it can secure a low buying price - particularly if we see an upturn in economics fortunes next year, as many analysts predict. Developments such as this show General Electric to be a company concerned with strategic economic decisions, which will ensure consumer, investor and shareholder confidence.
Similarly, General Electric made moves to increase the size of its engineering department less than a month ago. The company took steps to become the majority shareholder in the Indian engineering company Advanced Systek PVT Ltd. While General Electric refused to reveal the terms of this development, if we are to pair this acquisition with the one above, we can see that General Electric's economic expansion is a diverse and international one, which will go even further to please shareholders and investors.
As well as presenting itself as a company concerned with its economic expansion, General Electric also appears to be concerned with the development and improvement of its industry. The company announced this week it would be investing 7.5 million dollars in Australia-based company Nanosounds, which carries out medical research in ultrasound disinfection. The research aims to bring about innovations that will reduce the spread of infection in hospitals.
The above-mentioned medical collaboration, along with similar projects undertaken recently, suggests that General Electric is a forerunner in the improvement of medical technology and practice. Adding diversity to the company's structure, particularly with medical research companies prone to making important health development breakthroughs, is in my opinion key to focusing on a strong, upwards-climbing stock in the long term.
Additionally, General Electric has recently signed a Memorandum of Understanding with energy company Chesapeake Energy (CHK) in order to allow the companies to work together on the development of natural gas as a transportation fuel. The two companies have agreed to work together in a "multi-year" project, which will hopefully result in the use of naturally occurring gas, in both a compressed (CNG) and a liquefied (LNG) form, in the powering of transportation.
This is positive publicity for General Electric in two ways: firstly, it suggests that General Electric has genuine humanitarian, environmental and social motivations; secondly, it means that General Electric is used as a representative figure of the movement to raise public awareness of the energy crisis, and to harness alternative energy sources. On a less positive note, Chesapeake has recently announced it will be selling 4 billion dollars worth of assets due to mounting debt problems. I am uncertain as to whether this development will directly influence the stock market performance of General Electric, but it certainly is not fantastic news for the company.
Siemens (SI) is also in acquisition mode, announcing the acquisition of the FCE Furnace Company for an undisclosed sum. Mainly focused on providing industrial solutions, the company hopes that it will open up access to new industries and marketplaces that currently are not being reached. After the news was announced, stock prices reacted quite positively, and were bumped up by a quarter of a percent.
Overall, I think that General Electric's stock price has seen relative consistency because of the company's own consistency in expansion and development of its business and products. Such movements suggest that General Electric is keeping abreast of the most recent technological and research developments within the industry, and even that it is making its own breakthroughs. As a result, investors will continue to buy shares of GE.
However, if the company wants to see a rise in its share price, rather than just simply consistency, I would suggest that the company perhaps focus on consumer technology in its home and business and media departments. This would help to raise the profile of the company within the public consciousness and give consumers physical items and pieces of technology to associate with the company, in the same way that the iPhone is associated with Apple (AAPL).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.