GE, Microsoft on New Low List

In addition to Verizon (VZ), mentioned in my last post, there continue to be attractively valued large cap stocks hitting new lows in the latest market drop. Both of these names sell for about 13 times this year's earnings and 12 times next year's estimates. Pretty cheap valuations for both of them.

General Electric (GE) ~$30

 

Fortunately for those who have owned the stock for a while, the days of investors paying 30 or 40 times earnings for this industrial conglomerate are over. With a far more reasonable valuation at hand, investors can actually get some value out of GE shares.

Due to the company's high exposure to financial services (it lent money to many big ticket customers to aid in financing equipment purchases), GE stunned analysts by missing first quarter earnings estimates and ratcheting down its outlook for the full year. As a result, GE shares made new lows under $30 per share, yield a dividend of over 4%, and now trade at a discount to the overall market.

GE followers are used to the stock fetching a premium to the market, but value investors finally have an intriguing market bellwether to consider adding to their portfolios.

 

Microsoft (MSFT) ~$27

 

 

The Yahoo (YHOO) hangover seems like it will never end, but it will at some point this year. Before the Yahoo offer was made, MSFT's business was clicking on all cylinders and the shares had reached the mid thirties. We can argue whether getting Yahoo would boost MSFT's financials or not, but even if we assume no incremental benefit one way or the other, it is hard to make the case that MSFT shares are only worth 27 bucks.

Either way, a move back into the thirties is likely. While it would happen pretty quickly if Yahoo finally decided to remain independent and the end of the saga finally arrived, even a MSFT/YHOO combination would likely result in a higher stock price in the intermediate term, as Yahoo has little bargaining power to extract an excessive purchase price above the $33-$34 offered previously.

Full Disclosure: Peridot clients are long shares of the companies mentioned at the time of writing.

Comments

[Gerry Sullivan:]

I own both GE and MSFT and want to believe that they are values at current prices.

I can make a bear case for both. GE is 40% financial and what do they hold? If it is similar to what the banks and brokers have, there could be significant write offs in the future. What's the rest? Washing machines and locomotives and some medical technology, NBC.

MSFT might be like Kodak (EK) In the 1990s MSFT was the dominant computer and internet player. The Windows operating system, the Office suite, Internet Explorer all on top. Along comes
a couple of 20 somethings with a better search engine and MSFT is looking like a has been.

Everything else they have done has been mediocre at best. Does anyone think Hotmail is better than Gmail? It isn't even better than Yahoo. How about the MSFT search product? 3rd place.

How about games? How about Zune? Starting to sound like Kodak which dominated photography for 100 years, but was never able to adjust.

Recently, MSFT was #3 in market cap in the US stock market. EK held that same position at the end of 1972.

Wonder which companies were ranked 1 and 2? IBM and GM.

Time moves on.

2008 Jun 11 08:04 AM

[Emerald:]

MSFT has cash but is too big to accomplish much without a higher dividend. As noted above, GE is still a finance company and should be viewed accordingly. How does a finance company pull off a "green" initiative? The ads are great, but what company are they referring to? Should we value them as the Six Sigma of finance? I think not. Looks like green smoke. I hold GE for the dividend. Maybe I'm crazy or lazy.

2008 Jun 11 11:00 AM

[Chamois16:]

I think we may be underestimating GE's infrastructure position, which transcends the "green" idea. They have fielded 9000 1.5MW windturbines at $3.3M per to date, and the order backlog is growing, but they also build world class gas turbines (series 7 and 9) for utilities, have arguably the best new reactor technology in the ESBWR and dominate the transportation market with aircraft engins, pipeline flow compressors, shipboard propulsion turbines and locomotives. The financing unit is synergistic in enabling the sales of the big ticket items, some of which exceed $100MM each. I think the household appliance business is on the way out and maybe aircraft leasing. I am starting a position here at $30-31, despite six sigma and the past mistakes.

2008 Jun 11 01:17 PM

[ajhough:]

I have added GE but so far have lost money. I have had a position for about ten or so years and have added when the multiple was near the market or below. I am receiving about 4% and am awaiting for sanity to return to the market et. al.

2008 Jun 11 04:18 PM

[REBEL:]

I am about to buy GE because I don't think it will get much cheaper and it is a quality company to hold. They were stupid and greedy in entering the financial services industry - but I HOPE GE management learned their lesson and jettisons the parts of the company that will drag them down until they are sold. GE has many quality products that are either the 1st or 2nd best in the world - see 'Chamois16' comments above - and if they capitalize on their great products and dump their non-performing sectors GE will shine.

2008 Jun 11 11:14 PM

[contrariwise:]

The biggest problem with MSFT is that there really isn't anything that they do that somebody else doesn't do better. Whether that's office software (MS Office versus Google Docs, Star Office, OpenOffice.org, NeoOffice, standards based products, XBox versus PlayStation, Wii, etc, WinCE versus iPhone, Google Android). There are a lot of competent players eating their lunch. Good luck with your MSFT investment. You're going to need luck. The rest of the world is getting tired of being ripped off by their monopolistic business practices. Their Office revenue is not growing! Everything else they do has better alternatives.

2008 Jun 12 05:52 AM

[prsblue:]

If MSFT rips off Linux (like OSX did) and adds a touch screen interface they might do well with the next OS. Isn't that their genius? Stealing other technology, repackaging it, and taking credit for it?

I think the picture with GE finance (as well as other banks etc on the market) is really distorted. Things that go do down come up too. People that feel it's time to get rid of poor performing finance units are probably the same ones that would jump in when the market heats up - only to pay too much. It's amazing how easily people forget to "buy low, sell high". The last time you could own GE at these prices was when, 9/11 or so?

Also, consider what would happen if the government adopted some pretty aggressive energy policies. Who do you think could stand to benefit the most from a mandatory green technology overhaul through all levels of the energy infrastructure?

2008 Jun 12 11:02 AM

[No Moss:]

I'm stunned by the market's aggressive write-down of GE, now approaching $29 from a 52-week high of $42, a loss of about $130 billion in market cap. Does anybody think their credit losses will be that high?

I'm still waiting for info on the tanker thing. The Senate seems happy with the Northrop-GE contract, while the House seems to want to flip it to Boeing.

Airplane engines, airline leasing, and financial--OK, they could have some problems ahead. But GE is going to get huge slices of the 21st century's energy restructuring. Maybe Immelt isn't so dumb after all.

2008 Jun 12 05:16 PM

[truthinvesting:]

GE had sme heavy put buying last Wednesday and the fact they are doig business with Iran can not be helping with investors around the world

2008 Jun 16 08:56 AM