Originally written on 6/13/08 and updated yesterday.
I added more GE yesterday (6/12/08) at $29.70 (and again on 06/26/2008 @ $27.58). Please note that my portfolio results will continue to reflect only my initial entry point, as it does with all stocks (for example, my PWE entry point is shown at $30.11 even though I no longer have any of the shares bought at that price).
During the big market dip last summer, I re-evaluated and tweaked my investment strategies a little. One of the adjustments I made was to avoid mega-caps (say anything above $100B market cap) but I am making an exception here for the following reasons:
- GE, on a cash flow basis, looks reasonably attractive.
- 4+% yield at current prices.
- It’s still only the second smallest position in my portfolio, which is highly concentrated.
- In a post peak-oil world (and yes, I gather/hope there will be a world after peak oil), GE is positioning itself as a major component of the solution. The small tech innovators have a role to play (and you’ll make a lot of money if you can divine who the winners will be), but make no mistake — solving these problems is going to take scale and it doesn’t get much bigger than GE.
My view is that GE is being unduly punished for embarrassing Wall Street by catching analysts flat-footed on that Q1 2008. That’s not analysis, just my opinion. Some off-the-cuff analysis tells me that GE’s financial arm may be a black box and a significant portion of earnings but it’s combined with solid growth businesses with worldwide reach and scale. If some people liken GE Money to a hedge fund or pseudo bank, then I’d view GE as a financial company with a substantial (and unconvential) deposit base — in this case, cash-generating businesses in infrastructure, energy, healthcare, media, etc.
One of the main knocks on GE is “earnings quality.” Analysts have knocked them over low tax rates and this past quarter, their financial engineering (or lack thereof). One of the complaints is that much of their other business comes from asset sales (some of which didn’t come off this past quarter, hence the Q1 disappointment) and so there is an aspect of uncertainty. But a quick look at the past 5 years shows that GE has averaged $22B in free cash flow. Keep in mind this is based on operations (FCF = OCF - CapEx). Tallying items classified as “sale of business” or “sale of fixed assets”, I get a 5-year avg average of $14.5B from these sales so it’s not as if GE is utterly dependent on exits to run their business. And if you are going to criticize GE as a pseudo-financial company, then apply that standard across the board. How many financials can borrow money with a AAA rating, have access to cash flow many levels removed from the credit crunch and don’t have liquidity issues to the same extent as other financials?
In this light, Jeffrey Immelt has already gone on record stating that GE will maintain its AAA rating and not need an external capital infusion. His credibility is strained now but if he’s wrong, the man is guaranteed out of a job. BTW, he’s also buying shares[$]. I still trust Immelt to deliver.
The current turbulence is just noise in a crazy market. In the intermediate to long term, GE will grow its business and increase its dividend at a steady pace. My quick DCF analysis shows GE is undervalued by at least 20%. Will this stock double in the next 2 years? Probably not but if they can get back on track, there’s no reason we won’t see $40 again in the relatively near future and if the market really tanks, you’ll get a chance to buy a nice dividend yield and wait it out. Even in a “post-American-superpower” world, GE will be a prominent player so we should have some cushion against the weakening dollar.
As always, YMMV. Do your own due diligence or consult a financial adviser.