Blood in the Streets: Buy and Hold GE, For Now

General Electric (GE), one of the largest and most respected companies in the world, has seen its shares drop nearly 24% from its 52-week high of $42. In April alone, shares dropped from $38 to $32, a 16% decline precipitated primarily by continued weakness in the financial markets. GE’s Q1 2008 earnings, announced on April 11^th, came in below both analyst and management expectations, missing the mark by nearly 14%.

Blood in the Streets

A certain investor once said that those who seek to invest intelligently should “buy when there’s blood in the streets.” Heeding this advice has served this particular investor well. In fact, it has made him the richest person in the world, and he goes by the name of Buffett. Warren Buffett. (Not to be confused with James Bond, although the similarities are striking.)

See, Mr. Buffett believes that the price of a stock both rises and falls faster than the value of the underlying business. Thus, when blood is spilled, as it has been for GE, it’s a pretty safe bet that it was an over-reaction.

Now, don’t get me wrong, the Q1 results were pretty bad. Net profit and earnings fell 4% and 12% quarter-over-quarter, respectively. CEO Jeff Immelt, who – as recently as early March – re-affirmed prior guidance, is being raked over the coals for the underperformance. But it wasn’t all bad. Revenues rose 8% from Q1 2007, and strong global growth – 22% – provided hope that it would weather a significant downturn in the US economy. So if there’s a silver lining to be found, strong global growth in the Infrastructure segment would be it.

A History of Excellence

But let’s take a step back and take a birds-eye view, if you will (or even if you won’t), of the global powerhouse that is GE. Throughout its 115 year history, GE has had its ups and downs but it also has consistently increased shareholder value. Through dividends, which have been increasing steadily since 1962, stock buybacks ($1 billion worth in Q1, 2008) and earnings growth, GE shareholders have been treated very well. The financial markets are in unchartered waters right now, but they will emerge from the crisis and so will GE. Will the next few quarters be rough for GE and the economy? Certainly. Will GE recover? Absolutely.

So What Should You Do?

GE currently boasts a 3.8% dividend yield and while it is unlikely this dividend will be raised in the next few quarters, there’s very little concern that it will be lowered. Sit back, collect the dividend, take up knitting, and in a few quarters when all this has blown over, GE will continue along the same path it has been for over a century. And you’ll have pocketed some seriously sweet dividend payouts.

Disclosure: No position.

Comments

[NormanLepoff, M.D.]

People have been saying this for 10 years and the stock price has not changed.

[Ryan Freund]

Norman,

Even if the stock price doesn't change for another 10 years, the dividend will continue to be paid and increased. Virtually no downside risk and, if the stock does start to get out of its rut, there's significant upside.

[capgain]

Ryan,
You are obviously an investor (as am I) keeping your ship upright in a sea of traders. I have lived through tumultious markets and have ridden out the swells that have often been nothing more than traders trying to prove that they are smarter than everyone else and able to alter the tides. They came from the used car lots, spent time as day traders, and have migrated to the mortgage broker offices. Personally, I'm ok with waiting for the blood in the streets, and have added substantially to my GE position recently. My grandchildren will see first-hand the value of common-sense investing; thank you for your reasoned opinion.

[Ryan Freund]

Capgain,

No problem! I wish I had a grandfather that planned ahead like that! Good luck, though investors like us don't really need luck... :)

[Clearlead]

I am happy long on GE, which needs to get its finance and healthcare business straight but otherwise has great promise for the long-term with its infrastructure, power turbines, energy efficiency and wind power businesses...put it on sale and I am a buyer.

[ajhough]

I have been a long time holder of GE and I confess that I added to my position when it dropped once again. The dividend continues to grow and the P/E continues to drop. Earnings are doing fine but the price is on hold.

[bds231]

Ryan - Unfortunately the only risk is inflation. Given the data from the past several months, the 3.8% yield may turn out to be significantly less than inflation for the next several quarters/years.

Here's one thought I've long had about GE:

Go back to the 90s. GE was an industrial conglomerate with a touch of financials on the side, and its high-teens/low-20s PE was comparable to that of other industrials.

Today GE is a near 50-50 blend of industrials and financials (with a sprinkling of salt & pepper on the side in the form of Healthcare and NBC Universal). While other pure industrials still have PEs in the high-tees/low-20s, pure financials have PEs in the low-teens (not withstanding distortions from the chaos of the last few months).
So GE's current PE is about midway between a pure industrial PE and a pure financial PE, reflecting the blend of the company itself -- about midway between being a pure industrial and a pure financial.

Based on that very simplistic analysis, I wonder if GE's stock price will increase anytime in the near future based on multiple expansion. I also wonder if GE's stock price will continue to drop as the company further emphasizes financials and de-emphasizes industrials (and its PE continues to trend towards that of a pure financial).

I am long GE and also an employee of a GE subsidiary. Frankly, my biggest hope for my stock is that my subsidiary gets spun off.

[AJ,WashingtonDC]

As long as there are stocks that respond to trading momentum with big moves, resulting in instant gains (or loss, for that matter), GE will continue to be ignored by the market. The intrinsic value of its businesses, especially in energy and infrastructure is undervalued, given that most part of the worlds needs new or replacement infrastructure to keep up with their growth. No one has really been paying attention to their R&D, which has been making large investments in nanotechnology. GE's financial divisions may seem to be the downside, but it gives them access to cheap money since they are able to borrow at bank rates across the globe, wherever the are able to do business - this in turn allows them to provide their customers with attractive financing over a longer term. Its their domestic exposure to sub-prime and other instruments that puts them at a disadvantage, but its to the order of 2-3 billion, from their current Quarterly statement. They'll soon work through that... I agree that their stock doesnt seem to be doing anything, but in a sea of volatility, a small isle of relative calm is a welcome relief. GE has been punished enough for Mr. Immelts "lack of guidance", but he has learnt what it means to be the voice of GE in no uncertain terms. I don't think he will make THAT mistake again. All that said, this is a stock to keep accumulating - If you have a 10-20 year time frame, its the stock buy and forget, and when the dividends come in, reinvest in more shares. As one of the previous commentator said, its a stock that your grandchildren will be glad that you bought.
cheers,
Go Long and be Prosper!

[Ryan Freund]

bds,

GE is a global player, which partially shields it from inflationary pressure here in the US. Are there better plays out there? Sure, but GE, after getting the crap kicked out of it, might be one of the safest and best plays.

[greeytop]

I am a little puzzled about Dr. Lepoff's comment about the price movement of GE stock. My recollection is that we bought GE about ten years ago when it was about $22.00. It has been up to the low $40's before the recent swoon. The comment about the divy not offsetting inflation is well taken. I have been looking at GE to decide what to do. It seems clear that GE is really two companies: One is industrial ( and cutting edge at that), the other is a financial services company. Which aspect will prosper in the future? Another concern I have is this: I know an individual who was an IT trouble shooter for a GE subsidiary. This person left GE because the system they were working on had many bugs. The prevailing philosophy by management at this subsidiary, according to this worker, was "lets sell the system and we'll work out the problems after the system was installed". I don't know about other folks, but this management attitude is what helped damn near kill U.S. auto manufacturers. If this is true about GE management, I plan to cash out and go elsewhere.

[str]

a good way to identify airhead drama queen writers is if you see crap like this:

A certain investor once said that those who seek to invest intelligently should “buy when there’s blood in the streets.” Heeding this advice has served this particular investor well. In fact, it has made him the richest person in the world, and he goes by the name of Buffett. Warren Buffett. (Not to be confused with James Bond, although the similarities are striking.)

[PIA]

Growing Earnings and Dividends as the P/E contracts is a prescription for GE investors to have the wind at their back. Patience and discipline will reward GE shareholders. The Mid-teen P/E for GE reflects the 50/50 global industrial-infrastruct... make-up of its businesses. GE Credit/Capital is among the more disciplined financiers which will allow them to prevail and come through the current financial credit squeeze. Global industrial/infrastruct... businesses are leaders and growing in the high teens +. GE's EPS & Dividend Growth with a continually contracting P/E is an investment to hold and prosper with. 2007 was the first year in GE's 115-year history that "Non-US" Revenues and Profits exceeded "US" Revenues and Profits - GE'S GLOBAL GROWTH ENGINES are firing ! May the inpatient and undisciplined continue to give-up and sell GE so that I and my children might accomodate them by acquiring their GE shares at ever-lower multiples of growing global earnings !

[dectra]

I've come late to the party concerning GE, but I'm buying on the dips. One thing I've noticed about those 'poo poohing' the stock is that they don't seem to mention the effect of always reinvesting the dividend, which will offset the inflation issue....

[vaduz]

ill wait for a price below 30

[kas0157]

I am not waiting for a better price or till I think the bottom has arrived as cost averaging is the best play on G.E.

[DIEGOJAMES]

New buyer at sight of blood. TRAINS, WINDMILLS, TECH, NUCLEAR ALL ARE TREMENDOUS DIVISIONS. If GE holds sub prime that division should be"water boarded" and spun OFF.

I will add when dividend approaches 4% (equal to inflation) OR HIGHER but not over commit.GE needs a better plan...just like USA ENERGY POLICY is not serving the USA...investors and citizens deserve home run hitters.
GE Financial. Does China use GE FINANCIAL....does INDIA use GE FINANCIAL?????
*****GE *****BETTER IDEAS*****
1. PORTABLE WINDMILL OR TURBINE FOR BACK YARD
2. PORTABLE UNFOLDING SOLAR CELLS FOR BACK YARD.
3. PORTABLE FUEL CELL FOR GARAGE OR BACK YARD.
4. SOLAR CAR
5. ELECTRIC CARS
6. $$$must pay consultation fee for this one$$$
7. SPIN OFF TV STATION
8. $$$also available ***fee***
James
sunny -wind blown- Northridge,California

[whidbey]

GE is THE market in some sense, but is it still manageable? GE seems to have difficulty keeping its forecasts and budgets apart, as a consequence management seems to get confused about achievements vs. plans. Would the BRK model of conglomeration been more effective in keeping the managers more open? Keep my cup of cool-aid, I am still skeptical that GE is well managed.

[jstratt]

I have turned from an enthusiastic shareholder of GE to a smaller shareholder. Do I think GE will get through this... probably yes. However the risk is much higher than most people expect in my opinion.

I looked at the GECS 10k and at GEs reported results. First GE is a financial company and its industrial businesses are irrelevant. GE is a financial company with 81% of its Assets and 86% of its liabilities being financial.

I found I only like 54% of GEs Assets. I do not like the 211 billion of GE Money foriegn consumer and real estate debt. I do not like the 55 billion of off balance sheet securitization assets and I do not like the 44 billion of Real Estate assets purchased in the past 2 years.

I think GE will sell for $38 a share by year end. On the other hand if they had to mark to market I am not so sure.

[DIEGOJAMES]

THANK YOU Xing-HU AND JSTRATT for valuable insights
James

[afeldman1969]

I have read in here "mark to market," "subprime," etc., all symbolizing what seems to be the prevalent fear around the financial community now-a-days. GE is a financial play, no doubt; however, it doesn't have subprime exposure, and the big fear of mark-to-market losses is the need to raise capital at expensive prices to make up for the short fall, maintain required capital reserves, or offset those items in some way to maintain balance sheet strength.

Mark to market losses won't impact GE's balance sheet, and it certainly won't need to raise capital. Accordingly, if GE has to mark to market, they will simply mark up again when the market liquidity returns and will not have diluted in the process of surviving (in comparison to banks such as Citi, Wachovia, Bank of America, Lehman, Merrill, etc, etc.). In terms of earnings, while GE missed estimates in Q1, as opposed to losing billions like some of the traditionally large financial institutions, GE made billions of dollars.

If you believe that the Bear Stearns salvage mission by the Fed and JPM was the beginning of the bottoming process for the financial crisis, then you believe that GE won't miss again. When that happens, the market will realize that this was a one-time anomoly, as the company has claimed, and the stock will rise.

As for its trading range, I do think that GE has demonstrated a long-term trading ceiling of around $42/share; however, that is a ceiling it is currently well below, and perhaps a drop like this is just what the company needed to break out of its rut range of the past few years when it again climbs. If not, buying in and holding through 2008 with a company like GE is almost certain to payoff in capital return if you sell, or dividend payouts if you don't.

Disclosure: While I have never played GE before last month, I am now long GE at a price of 31.87. If it actually did dip below 30, I would certainly buy more.

[Clark]

GE is VERY well managed. I used to work there. In some ways its 'over' managed.. but they do get every ounce out of all there employee's the've got. They've got that down to a Science!

I wouldn't be surprised to get an upward revision in earnings in Q2 as Immelt said they had a few big deals 'push' into Q2 at the end of Q1.. and .. if we all recall.. they were not able to sell some paper at the end of Q1 given Bear Sterns. I find these explainations credable. I find Immelt reaffirming guidence in late March increadable however.. and he might have been better to not say anything. I think it could stem from the fact that he came into the GE Corporate side of the shop via the industrial businesses and not from GE Capital. I suspect that WONT happen again.. and they will get Neil or some other key GE Capital officer guy in the main office fast. (that and beat on him for missing earnings).

Keep in mind, while GE Capital was a 'weakness' for GE.. overall they do a lot of things for GE year in and year out.. and is critical to maximize financing and placement of GE products. (They finance there own stuff don't you know too). The leases they do provide 'depreciation' to the main company sheltering there 'real' earnings significantly from government taxation. They can take advantage of global currency markets, and they have fingers into almost every major industry in the world. If it happens.. GE knows about it.. and the power of 'real' information is invaluable in todays global markets. It much like a spider on a web.. something tingles.. and they know about it.

I would buy this stock ANYTIME below 35. The reinvesting of dividends and EXTREME assets they have on the books (book value) make this company just about bulletproof to inflation as it can be (as the assets would also 'inflate'). Reinvestment will make you rich. It just so happens the stock has been on 'sale' the last few weeks.

Dial this one in. Its a LONG TERM HOLD and LONG TERM BUY anytime you see the P/E here. Worst case scenario.. which I don't even think is reality.. is they start spinning stuff off like Jet Engines.. or just taking these 'subsidiaries' public.. how wouldn't you be a multimillionaire in that case. They own so many industries as the 'A' player.. you would be insane to think you haven't bought something of real value and cash generating. Remember.. they made OVER $4.3 BILLION in net income in Q1. $4.3 Billion. Thats a lot of cash... oh yea.. and they bought a $1 Billion in stock. Thats almost as many dollars as McDonalds has served hamburgers over 40 years.. and they did it in a QUARTER!!!

Accumulate GE while you can. When its at 80 and raising its dividend you'll be happy you did.

Todd

[No Moss]

Well, I'm optomistic about GE both short-term and long-term. It does face the problems well-stated above about being a financial company. It also faces the problem of being a big company and a conglomerate, hence making it hard to move the stock price. You could compare it to Johnson & Johnson in that respect.

Short-term, the government has allowed it to reopen its Utah manufacturing facility, and it is seeing opportunities in both airplane engines and airplane leasing, the latter of which is benefiting from GE's deep pockets and cheap financing costs.

It is well-positioned to benefit from power and water needs, too.

I hope and trust it will be a beneficiary or the change to fluorescent lightbulbs, and eventually to LED lighting.

I think GE is a long-term beneficiary of the weak dollar, too, since there are few players of its scale in the world, and the most notable is Siemens, which is caught in a Euro trap. Think of it as roughly analogous to Boeing/AirBus, both prospering when demand is high, but the European versions looking nervously at what will happen when demand is lower.

Finally, the energy need/environmental concern thing plays into GE's hands, and this could reach a fevered pitch when we start to substitute electrical energy for petroleum energy.

I like this stock now and for the future. The financial industry is getting a big dose of discipline and deleveraging, but better days are ahead in terms of loan quality, and GE, even more than investment banks, will probably be allowed to remained leveraged in an environment where both loan quality and interest spreads are going up.

[macimages]

what about the military aircraft contract that is supposed to be announce on 5/15. GE and one other company are involved. I don't see much about this in the financial news