Is General Electric Overvalued?

First let me state the obvious: General Electric (GE) is a well run diversified company with a great track record.

However, as its financial activities are a growing part of its portfolio, what would be the effects during an economic downturn?

There are three divisions which rely on financial products for its profits:

1. Money
2. Commercial
3. Infrastructure

I would like to discuss each in turn.

GE Money is heavily involved in credit and store cards, personal loans, etc, which are highly susceptible during an economic downturn. The first problem involves consumers defaulting on their credit cards, which is bound to rise during this scenario. Secondly consumers may pay off their GE cards, by using other financial products, and effectively stop using their most expensive forms of finance (credit cards in general).

GE Commercial has many high value loans for real estate. etc, which may default over the coming months, as the asset value of these properties drop.

GE Infrastructure arranges loans for high value products that are produced by GE, engines, turbines, etc. If buyers stop buying during a downturn (at their current level), the company will not only lose the profits generated by the product manufacture, but the lucrative financial element also.

GE arranges a lot of its financial requirements on the open market by issuing corporate debt [AAA], but spreads are widening and their credit will be more expensive. At present, their long term debt is around $360 billion (gulp!), but this is not an unreasonable figure when the economy is growing at a fast rate. However, even a 0.5% increase in the credit costs will hurt at this amount of debt.

The other divisions should help to manage any short term problems, but owing to their financial exposure, I feel that they may be currently overvalued. I don’t think that they will be able to hold onto their current debt rating, which will exacerbate their problems in the short term.

Disclosure: none

Comments

[frcf:]

What utter nonsense. Sorry to sound harsh but, shouldn’t evaluating a security involve at least some form of calculation (discounted cashflow maybe)? Or, should we just base our investment decisions on “…more cardholders might default…” or “… we may have a recession…”? And, the part about how the widening spreads will hurt them!!! If anything, the widening spreads will actually earn them more money since they will be one of only a few firms who can still borrow money relatively cheaply and lend it out at a even higher rate than before. Even if their AAA credit rating is revoked (which at this point does not seem likely), they will still have a high credit rating RELATIVE to others, so their profitability will remain intact. Tighter credit environments in fact benefit the strong well-managed firms who can gain market share at the expense of the capital starved lesser players.

2008 Apr 08 04:14 AM

[Lawrence J....:]

This article may explain why GE is trading where it is: its financial exposure is depresssing its multiple. But the article gives no reason to believe that these challenges are not already priced in, and so no reason to believe that the stock is overvalued at current levels. The article could as well have been called "Would GE be overvalued at $60?"

2008 Apr 08 07:11 AM

[DUP:]

GE is the best managed company in the world....your article is pure nonsense...what are you trying to get it down so you can load up on the most stable, consistent company ever. Can't spell GrEat without GE.

2008 Apr 08 07:19 AM

[Mule:]

All valid comments. Just because GE is well capitalized doesn't mean their earnings are protected during an economic downturn.

2008 Apr 08 07:20 AM

[robert99:]

GE is overvalued because it's P/E ratio is too high for the largest company in the world. 13 would be fairly valued, at which point I'd be a buyer. Still, however, it is obviously a well run company, and that dividend probably isn't going anywhere... I would advise anyone to buy GE as a cornerstone of their portfolio (along with a few others, of course).

2008 Apr 08 07:55 AM

[CurtisD:]

Name me another stock is diversified as GE that pays over a 3% yield. That's right there is none. Does GE have problems? Yes. Are they recession proof? No. But for anyone investing long term (which everyone should be), there is no better place for your money. It's ridiculous to separate the financial piece of GE from the rest of the company and compare that against the financial markets.

2008 Apr 08 08:44 AM

[AtilladeOlmos:]

To say your comments are dimwitted would be an understatement. GE will not loose it's AAA rating nor will GE Capital. You sound like Chicken Little and just so you are certain ... no , the sky is not falling.
~ Atilla

2008 Apr 08 09:46 AM

[Gaucho420:]

GE OVERVALUED?!?!?! That's the funniest thing I've heard in a LONG TIME!!!! Whoa! Hilarious, yet a bit worrysome that people with such poor analytical skills can write articles on here. Isn't there a screening process, why is this published?

2008 Apr 08 10:51 AM

[capgain:]

Of course you are correct.....and if you have any of that over-valued GE stock that you would like to unload at a "fair" price of $33, or $30, or $26....just get back to me. I'll take it off your hands.

2008 Apr 08 11:03 AM

[Football Geek:]

GE is one of the best companies in the world, with so many positives
it would take pages to write. Yes, there is some concerns with the
financial division, but they are minor.
I would say that the infrastructure part is in a high growth area, especially with the back log of spending on new water systems, roads, hydro projects, etc. around the world.
Developing hots spots like China, India, Brazil, Turkey, etc. will be
spending trillions on the services that GE provides. I would say that the true value of this company is UNDERVALUED !!!!!!

I hope the price does drop, because sooner or later the true value
will be reflected in the share price. I plan to "load up" anytime the price falls in the low 30's.
Cheers

2008 Apr 08 11:05 AM

[Football Geek:]

I would also like to say that the quality of the this web page has
not been the greatest lately.

2008 Apr 08 11:08 AM

[Gaucho420:]

I GE Money's corporate credit line business and mortgage business have both been sold. The Mortgage business was sold last year and the credit card business was sold to AMEX for $1.1 Billion on 3/27/2008. The rest of GE Money's consumer division is focusing on emerging market that don't have credit cards such as eastern Europe. Hence, GE Money's profits have gone from $230M in 2004 to $944 M last year. GE itself, as of 4/1/2008 via the Financial Times, predicts profits of nearly $2 Billion in 3 to 5 years, an over 100% increase over the 2004 figures IN SPITE of the financial crisis.

So GE Money point 1 in your article is not a risk, its a growing business. The commmercial business is EXTREMELY strong...beleive me on this, its what I do for a living. Commercial real estate is strong worldwide and will continue to be strong...to say anything other simply shows that you're not in the business and I advice you to do a bit more research, as listing this business as a risk is simply false. Asset values of commercial real estate properties are not going down, at all.

GE Infrastructure is perhaps its strongest business, with major clients worldwide and growth currently led by China and India. This isn't going to stop growing, its accelerating quite fast. Again, I ask for stats backing up your argument...if you want to see stats on this, look at the annual report.

In the end, this article simply does not provide the data to back up its assumption. How/Why is it overvalued? What specific GE business are going to drag on it, EXACTLY?

2008 Apr 08 11:11 AM

[UnKle AL:]

Please continue to bash and downgrade GE . Your bias simply makes it cheaper for me to keep buying one of the world's best investments at an ever lower price. . Thank you

2008 Apr 08 01:29 PM

[AJ, Washing...:]

From the fundamentals, and future potential in their infrastructure (think power plants and nuclear reactors), aircraft engines, wind turbines and medical equipment sales, especially in the "strong currency" parts of the world, my thinking is that GE is undervalued. However, I do have a concern that Financials make up 40-45% of income for GE, as much as Infrastructure. NBC is sure to do well covering the Beijing Olympics this year in addition to their regular broadcasting ad revenue. I like the 3% dividend, too. To top it all, they have Siemens AG reeling on the ropes, unable to compete with GE's pricing.

2008 Apr 08 02:52 PM

[larrykat:]

Wow! Seems like a few people disagreed with the article's contentions. I guess I don't have to then. (GE owner since 1995.)

2008 Apr 08 03:13 PM

[bayareaflyer:]

This guy hasn't got a clue what goes on inside GE. He is basing his wild ASSumptions on his knowledge? of what he is seeing outside GE.
GE is so far ahead of the curve in these business's, and moving so fast that people like this fellow are analyzing yesterday's business model.
He really should do at least a little research before he writes about a company.

2008 Apr 08 05:09 PM

[woozler:]

To start this idiot's research, let me suggest the following
interview with the Financial times

to cut to the chase ... take note of future revenue
projections

www.ge.com/investors/i...

I like so many who have responded to this post ...
so many total fools offer opinions with no foundation
perhaps the original author, Chris Marshall, might
provide further thoughts on why he is correct in
his suspicions and Immelt is wrong .. especially
given the fact I cannot remember any time when
stated anticipations were not met .. or were
grossly overstated to garner short term support

idiots ... sigh

2008 Apr 08 09:09 PM

[MB1968:]

The person who wrote this nonsense should be barred from writing or commenting in any form on any stock if this garbage is what his "research" produced. People should not be allowed to write about things they have no clue about.

2008 Apr 08 09:56 PM

[No Moss:]

Well, let me start by saying that GE is the biggest position in my portfolio. I don't expect it to slay dragons, but I do expect steady growth in EPS and dividends. It's selling at a reasonable valuation re: projected 2008 earnings. We'll see how dependable those earnings are this Friday, when GE reports earnings.

I think it's clear that GE has upped borrowing while rates are low. They have a backlog of orders in some of their key businesses, including infrastructure work in power plants, water, and airplane engines.

Their size is a big advantage in that they have adequate financial and personnel resources to do things. They're selling in dollars, which is a decided advantage when competing against that other giant, Siemens.

I don't expect rapid growth because of its size. Neither do I expect any significant downside in a business that is benefiting significantly from globalism and from further entrenchment in the financial markets, with increasing interest spreads.

2008 Apr 09 08:36 AM

[woozler:]

at least our idiot is free :(
for $665 you can buy the
following sell analysis

Symbol(s): GE
Date: 9-Apr-08
Author: Rapid Ratings
Contributor: Rapid Ratings
Title: GENERAL ELECTRIC CO rated sell (2008-04-09) (US$665)
Document Size: 8 pages
Price: $665

2008 Apr 09 09:47 AM

[hook:]

yes this guy's article is awful but none of the bullish comments from others are making me want to buy GE either. "well managed" "great company" "so far ahead of the curve" "continuously delivers"...yawn. I think there are better stocks for you money that come without the financial exposure..sbux, hd etc.

2008 Apr 10 08:24 PM

[hook:]

Mr. Marhall, nice call afterall. Not very well written, but nice call on GE. The bullish commentators owe you an apology,that is if they can talk while choking on GE shares...

2008 Apr 11 06:42 AM

[Ganesh Kumar:]

I think GE's infrastructure division is still doing good. The ROTC is at 18.1%. I would buy if it drops below 30. As usual if premarket trading is any indication everyone is over reacting.

2008 Apr 11 07:38 AM

[uncle nunzie:]

I think what many of the pre-4/11 comments miss is the author simply posed a question about GE shares price, given obvious macro-economic forces active for some time now.

As I read through the comments, I was struck by the defensive and emotional quality of many of them. At a good price, GE will enter my portfolio as a permanent holding. What that good price will be is when I feel compelled not to miss out. Perhaps that will be when the dividend yield reaches ~4%. For now, I will wait with GE on my watch list.

2008 Apr 11 08:12 AM

[Chris Marshall:]

Thanks for your comments, good and bad. I would just like to point out a few things:
1) GE is a great company, but I rate the price at $28-$30.
2) Any company with exposure to the financial sector is probably overvalued.
3) Writedowns are likely to occur for the next 6 Qtrs.
4) The FED/IMF think that US growth will be around Zero- One Percent.

The reason that I feel that GE was overvalued, is that ALL US stocks are currently overvalued, when the P/E drops to between 12 and 13, I will reenter the market. Until then, cash is king, and I will sit and wait until I think that the risk/reward balance is OK.

Best regards,

Chris Marshall

PS: I hold no stock in GE, so I do not have any axe to grind.

2008 Apr 11 09:20 AM

[InvestBaboo:]

What a bunch of bullish morons! The author made some very good comments and he has been vindicated today! I spit on all of you for not having the common sense or the courtesy to respect someone else's point of view. Now you dimwits go bleed with your GE stock while you could have paid a little more attention to his points and perhaps hedged your portfolio!

2008 Apr 11 12:30 PM

[Norman Lepo...:]

The comments were better than the article, but I appreciate the author's thoughts.

2008 Apr 12 01:06 AM

[oldgoldbug:]

Golly. I guess I would rather read an opinion that is "not well written" and have it be right than all these beautiful reports that are so very wrong. I give you credit Mr. Marshall and I do intend to read all of your other pieces.

2008 Apr 13 06:22 PM

[User 181046:]

how do i read the other comments?

2008 Apr 21 08:51 AM