General Electric (GE) is one of the world's largest companies. It is involved in a number of industries including appliances, healthcare, aviation, jet engines, energy, financing for businesses and consumers, lighting, rail, software, water, and more. This company operates around the world and derives over $30 billion per year in revenues from Europe. GE has about $140 billion per year in global revenues, so the exposure to the eurozone is significant. There are a number of signs that global economic activity is slowing, and that, along with other issues, could lead to a decline in GE shares in the second half of 2012.
With all the macro issues, I would not be surprised to see GE issue a warning or miss earnings in the coming weeks. One of GE's biggest competitors, Siemens (SI), recently said that meeting estimates will be challenging, and that could mean GE is facing similar weakness from Europe and other areas. Here are five reasons to consider selling GE shares while the stock price is still elevated:
1. Siemens, a company based in Germany, is in a number of the same industries as GE, including healthcare, aviation, energy, financing, lighting, software, water, etc. If I had to pick another company that is most similar to GE, it would be Siemens. If Siemens shares are acting weak and the company is being impacted by European and global weakness, it might be safe to assume that GE is also. For the past several weeks Siemens has been seeing slower-than-expected sales from China and Europe. The CFO of Siemens, Joe Kaeser, even called Europe a "basket case." It's hard to see how GE could escape the European weakness, especially if other major companies are experiencing slow demand now. A recent Bloomberg article summarizes some of the concerns pointed out by Kaeser:
Unfortunately, what we have been seeing in the last eight weeks was that short-cycle businesses are being considerably weaker than we have been originally thinking. It's going to be quite a rocky road to meet the targets for 2012.
2. Siemens shares trade close to their 52-week low, while GE shares trade near their 52-week high. Even though Siemens has more exposure to the European economy, that contrast in share prices is not likely to last. Most likely, either Siemens shares are too low or GE shares are too high. With many challenges to the global economy, the discrepancy in valuation is most likely to be settled with a decline in GE shares in the coming weeks and months.
3. GE has exposure to industry and finance, both of which are likely to be increasingly impacted by the European debt crisis. Companies with this exposure can be hit hard in recessions and times of economic crisis. GE shares tumbled in the last financial crisis to just $7.06 in March 2009. With the stock at about $20 now, there is significant potential downside.
4. GE's balance sheet is another factor to consider, especially if the economy heads lower. With nearly $140 billion in annual revenues, it has about $83.6 billion in cash on the balance sheet and $442.8 billion in debt. By contrast, Siemens, with about $94 billion in annual revenues, has a much stronger balance sheet with about $15.4 billion in cash and around $24.4 billion in debt. GE has about 50% more revenue than Siemens, but around 18 times as much debt.
5. The U.S. economy and GE will not be insulated from the weakness in Europe, China, and elsewhere. And let's not forget about the looming fiscal cliff and tax increases that could come as the government cuts
the budget in the coming months. Also, if you are buying GE shares for the dividend, that could be an issue since tax rates on dividends are poised to rise significantly under Obama's 2013 budget, from 15% to as high as 44.8%. Another factor to consider is that a stronger dollar could also negatively impact earnings for GE. Because GE exports, a stronger dollar can reduce profit margins.
With General Electric shares within one dollar of the 52-week high, it could be an ideal time to take profits and wait for what is likely to be a much lower price and buying opportunity. It does not appear as if the economic weakness and other looming fiscal threats are priced in to GE shares yet, and when they are the stock is not likely to be trading near its 52-week highs.
Here are some key points for GE:
- Current share price: $20.43
- 52-week range: $14.02 to $21
- Earnings estimates for 2012: $1.55 per share
- Earnings estimates for 2013: $1.76 per share
- Annual dividend: 68 cents per share, which yields about 3.5%
Siemens is another major conglomerate with businesses that include electronics, finance, healthcare, automation, telecommunications, and engineering. Siemens is one of Germany's largest exporters and it derives significant revenues outside of Europe. Siemens trades for about 10 times earnings while GE trades for about 14 times. If the global economy continues to deteriorate, both of these stocks could see earnings and the share price fall, but GE shares are likely to drop more due to a higher valuation and more highly leveraged balance sheet.
Here are some key points for Siemens:
- Current share price: $79.63
- 52-week range: $77.95 to $138.46
- Earnings estimates for 2012: $8.02 per share
- Earnings estimates for 2013: $9.02 per share
- Annual dividend: about $2.85 per share, which yields 3.5%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.