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.