We compared at the 2010E P/E and 2010E P/E/G multiples for all 30 companies in the Dow Jones Index to look for the cheapest stock on the Dow. The results:
2010E P/E: Pfizer (NYSE:PFE) with 6.8x versus average of 13.4x
2010E P/E/G: General Electric (NYSE:GE) with 0.96x versus average of 1.88x
Let's look at these two stocks, to see why they are so cheap.
Pfizer, a big pharma company, has major issues with patent expiration coming in the next few years. Lipitor is Pfizer's largest drug in terms of sales with $11.5 bn (or 23% of total sales0, however it is expiring in 2010. The company acquired Wyeth for $68 billion in October 2009 to help add new products to its pipeline.
General Electric is a large multi-national conglomerate that makes everything from lightbulbs to aircraft engines. The biggest issue weighing on this stock is its GE Capital or finance business, which comprises nearly 40% of their 2009 sales. GE Capital is 40% of their sales, but only 14% of their operating income. That's because this sgement only has 4-5% margins, compared to 15-20% margins in GE's other three segments. Finally, the finance business is extremely capital intensive, most of GE's cash (and debt borrowing) is used up by this segment.
The lesson here is that not all stocks that trade at a low multiple, and seems cheap, is a good investment. You have to do your diligence and see why this stock is trading so low, and if it's justified. In the case of GE and PFE, we've told you good side (cheap multiples) and the bad side (patent issue and finance issue). You have to make the decision whether the markets are punishing their stocks too much or too little (where the low multiples already fully factor in these concerns).
For FREE weekly up-to-date valuation multiples and operating metrics on all 30 companies in the Dow Jones Index, visit our website at www.valuemole.com.
Disclosure: Positions in VZ, KFT