Is GE a Buy?

GE (GE) disappointed and shares got pummeled, down 11%. Is it a buying opportunity? I guess I am wondering why one would want to own it anyway?

First the numbers:

Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year earlier. Revenue rose 8 percent to $42.2 billion, less than GE's prediction of about $44 billion. GE was expected to earn 51 cents a share.

CEO Jeffrey Immelt also cut the annual forecast he had once told investors was ``in the bag'' for 2008 and did so again on March 13. He says capital markets seized up just days later, forcing GE to slash the value of some securities in the last two weeks of the quarter and blocking some asset sales. The new EPS forecast is $2.20 to $2.30 a share, down from the previous forecast of "at least $2.42".

So, should you pick up shares? Not me. Even with Friday's sell off GE still trades at 15 times the new earnings but does sport a 3.8% yield. For all its diverse businesses GE is essentially a financial services company with 40% of earnings coming from that division. Immelt said Friday that finance units may have a profit decline of 5% to 10% this year and that will offset a non-financial units increase 10% to 15%. The other main driver is it infrastructure business which grew EPS 17%.

All that being said, when you have a business as large and diverse as GE, the value to shareholders comes down to the man at the top. Look at Berkshire Hathaway (BRK.A). A huge business that is basically an insurance business that, like GE, has its other businesses in industry. The difference is that with Berkshire, you have Warren Buffett, perhaps the greatest capital allocator ever at the helm. Through that, he can drive results. Immelt is good, but he is no Warren.

There comes a point where conglomerates simply become too large for shareholders to truly benefit from the performance of the diverse businesses. What happens is a mean reversion to mediocrity in the multiple people will pay for shares. This is why for the last 7 years GE has traded between $30 and $40 a share, with only a brief drop below it in 2002.

GE's financial services and health care divisions are now a drag on the high flyers like infrastructure. By itself, it would command a PE of at least 20 based on its growth rate and prospects. GE as a whole now trades at 15.

What GE should do is an Altria (MO) like spin of the infrastructure business to the shareholders. Without that business, the multiple left on what is left on GE would shrink and then you would have a potential value opportunity there with a nice fat dividend yield. Value inclined investors would likely pick up shares, support the price. This would be offset for current shareholders by the PE expansion on the infrastructure business.

This would allow shareholders to fully benefit from the current strong growth in the infrastructure business while at the same time allowing them to participate in the rebound in financial services and health care.

Likely? No. Would work though...

Disclosure: Long MO.

Comments

[CrossProfit]

Disagree with your 'Altria like spin-off'. Surely if you dug a little deeper you would figure out the differences.

CrossProfit

[BoringMarket]

It surely isn't a buy right now, but wait till it goes lower...think long term. I wouldn't touch it for another week or two (maybe even months) and though its its no Berkshire its sheer size will have this company bouncing back.

[SingHash]

Sullivan says: "...why one would want to own it anyway?"

Okay. I'll answer that question for myself.

* Forward P/E: 12
* Dividend yield well over 3% @ 52% payout
* Profitable business
* Diversified across sectors, industries, technologies, and geographies

GE has deep pockets to buy out distressed OR dangerous competitors during an economic downturn.

In my eyes, these characteristics illustrate a stock to promote sound sleep through any economic turbulence.

[lifa]

Not right now , it should go lower..

[FootballGeek]

Speaking of Warren, "It is better to buy a great company at a good
price, then to buy a good company at a great price"

[shur1l]

firstly, 1/3 of GE's earnings come from financial operations not the 40% the article states. That does not make GE - again as the article suggest - 'essentially a financial company'! In fact GE is essentially an infrastructure company. Furthermore, the businesses complement each other, allowing the cheap AAA rated debt to be used where ever there is more potential for growth.

When GE had a p/e of 30 everyone wanted to own it. Now at p/e 14, no one wants to know. I call that opportunity. What is amazing is that, GE's earnings yield is actually much higher than what their AAA rated debt will cost them after tax. So, as Immelt mentioned in the CC, they will keep buying back stock.

It's the most widely owned stock among value managers:
www.dataroma.com/m/hom...

As a side note Immelt is a personal friend of Buffett.

[Bunchgrasser]

The decision to buy GE depends upon what your investment objectives and timeline are. I see this as a great company, great future, great yield. My horizon is 5+ years so I'm not worried about what the stock does next week. I may buy more next month whether it goes down or up.

Danno

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful"

Warren Buffett

[todd su]

cross,

i meant a "tax free exchange" to shareholders when i said "altria like"