GE: Exceptional Total Return Potential at the Current Price

It is difficult for most investors to get a grasp of a company as diversified as General Electric (GE). Does GE still make light bulbs? How about nuclear reactors? Yes to both of those, although light bulbs (GE's original product) might be gone if GE goes forward with an announced plan to spinout certain slow growth businesses including lighting and the 100-year old appliance business.

What happens to GE's organic growth rate if the appliance business is jettisoned? Does it go from 9% to 10%? Maybe in theory, but there are so many other variables that will come into play. Will the infrastructure business remain strong? Will emerging market growth slow?

GE's NBC Universal unit nailed its coverage of the Olympic Games - they deserve at least a 9.5 score. But will the strong ratings and buzz translate into an extra penny per share this quarter; will there be any longer-term benefits?

And while its financial service business has held up relatively well compared to the rest of this sector, it remains a concern for many investors.

The point is that it is almost impossible to draw an investment conclusion regarding GE, based on an analysis of its individual businesses. While GE provides a wealth of detail concerning its businesses, there are just too many factors to consider. In any quarter or year, there are bound to be offsetting surprises.

And there lies the problem with GE's current stock price. For most of the past 30 years it wasn't all that necessary to analyze GE's individual businesses. GE simply delivered on its objective of double-digit EPS growth. The market didn't seem to care which segments were contributing, just that strong EPS growth somehow materialized.

The ability to deliver consistent and predictable EPS growth quarter after quarter earned GE a premium valuation, which has evaporated over the past year or so, as estimated earnings for 2008 and 2009 show flat to modest growth.

However, for investors that are willing to look beyond the current weakness, GE has excellent total return potential. First, GE's earnings growth rate should eventually recover to double-digit territory. It has leadership positions in all of its businesses, its end markets are diversified and have good long-term growth prospects, and it has strong management throughout its organization.

Second, GE's valuation is very compelling. Its stock trades at 12.8 times next 12-month consensus estimate – a slight discount to the market. For most of the past ten years GE has commanded a 10%-plus premium to the S&P 500 average P/E ratio.

Third, GE has 4.3% dividend yield. From here on out, you need just 6% annual capital appreciation to have an investment that delivers 10% total returns. Finally, GE is one of just six companies in the S&P 500 with a "AAA" rating from both S&P and Moody's – a indicator of its strong financial condition.

Disclosure: Author owns a position in GE and manages accounts which hold GE.

Comments

[epeon:]

I am not particularly impressed by this analysis. Basically, it says that GE has come down in price, has a relatively low pe now, and pays a good dividend. It is assumed that its earnings growth will become double digit but in no way indicates why.

All of the above is true, but it does not mean that it can't stay that way for years. There are a lot of stocks that have the same above criterion. So, tell me this, why is GE better then the alternatives?

2008 Aug 25 09:50 AM

[Chemist29:]

GE is a good company, it makes boatloads of money, but oh wait, the stock price does nothing. Stay away from GE, there are better stocks elsewhere. Its just too hard to exceed expectations, and that's why GE stock doesn't do anything. Another example is MSFT

2008 Aug 25 09:58 AM

[Norman Lepo...:]

I agree with the author and the comments.

2008 Aug 25 10:48 AM

[helplessobs...:]

I would rather have GE stock than yields >4% and may increase that yield, than a 10 year Treasury bond that yields 4%. Most investors do not know we are in a secular bear market that started in 2000. These markets live for 15 - 20 years and most of the return is from dividends. I know having invested thru the last secular bear dating from 1966 to 1982. Five times the Dow kissed 1000 only to retreat to 600. In '82 it broke out into a new secular bull that ended in 2000.

2008 Aug 25 11:30 AM

[Michael D.:]

It does nothing? Look at a stock price chart from 1965. Now consider dividends too. Can it repeat for another 40 years? What are emerging opportunities: Media, Nuclear, Wind Energy, etc.?

2008 Aug 25 11:50 AM

[Fam62c:]

I think that GE is a "behemoth" that is too big to manage effectively. They need to get a CEO with the Altria mentality to spin off NBCU and the consumer finance units. Stick with the tecnology/infrastructu... businesses and financing for these products; this is where the future is as the world grows. GE needs to decide what it wants to be; it can't be everything. I still have some GE but I've moved most of my GE position to Siemens because I believe they are a more focused technology company. I think it's too hard to run a huge company that has too many balls in the air. GE could unlock a lot of value by breaking up the company and letting the seperate units run free. What doesn't fit here: locomotives, wind turbines, industrial steam turbines, jet engines, industrial electric generators, de-salinization plants, movie studios. I hope they demolish the house that Jack built. What did Peter Lynch call it........deWORSificat...

2008 Aug 25 12:57 PM

[kurt walter:]

GE is too big. There are thousands of better stocks.

2008 Aug 25 07:54 PM

[John Galt:]

GE has its place in many portfolios. It has super-safe dividend coverage. The stock price could go down more in a market crash, but it seems less-likely than many other stocks. They are in a bevy of great businesses, and their finance unit is a "sleeper" just waiting for the economy to re-engage. As a "broad theme" investor, they are one of only a few companies that hits many of my major investment themes. Water shortages, alternative energy demand (wind, nuclear, hydroelectric, and solar), more and cheaper transportation (jet and locomotive engines) are all major changes happening in society. They have huge relationships globally. Once they jettison consumer-brands, they will be positioned for a Welch-like run into the next decade as demographic trends drive capex business right into their sweet-spots. Despite some bumps and gradual deflation in the stock price, their ROE has been rock-steady thru Immelts tenure, and that is the real measure of management. But now the Welch premium is gone, the blood is in the streets for them in financials, and consumer-brands is their last remianing weak spot. This is a great 10-year buy-and-hold here. Buy some for your mom.

2008 Aug 25 08:36 PM

[canuckify:]

As a holder of GE, I have it setup on dividend reinvest -- and consider it my bond position. Granted, it may not double. But, as a relatively young investor with a long time frame, I'd rather own GE stock as my low risk investment than the 10 year bond. I am getting more than the 10 year treasury in a security that raises its dividend at a 11% rate -- put it on dividend re-invest and its a no brainer relative to bonds. Granted, I agree that there might be more attractive stocks. But, lets be sure to compare the risk adjusted return outlook for both securities. I love to go long leaps on securities for my risk --- but, for my safe investments, I'll hold GE all day long.

2008 Aug 25 08:47 PM