Consider This Manufacturing Titan for its Strong Earnings

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When looking around for stable, solid blue-chip names for your income portfolio, it’s hard to ignore General Electric (NYSE: GE). GE is the largest corporation in the American market and does business in just about every other country as well. It is a diversified industrial technology and financial services company with products ranging from aircraft engines to household appliances. With a market cap of nearly $240 billion it is one of the world’s largest publicly traded companies and the world’s largest producer of electronics.

Earnings

As far as I’m concerned, GE’s most attractive feature is its earnings, which once again came in very strong in Q2 2012. Operating EPS came in at $0.38, up 12% and representing a beat of a penny. Revenue was up 2% to $36.5 billion, taking into account negative Forex translation of about $900 million. GE is increasingly able to generate income from outside the US, as it stands to gain greatly from infrastructure projects in growth markets worldwide. GE’s outlook remains unchanged, expecting double-digit EPS growth for 2012. The firm has a cash flow from operating activities of over $33 billion.

Fundamental Metrics

In terms of valuation, the company isn’t as cheap as I would like to see it, but still appears to offer good value looking forward. According to CNBC General Electric trades at a fairly rich 20.1x TTM earnings, and a more reasonable price to book of 2. However, the forward P/E is only 13.8x, quite a bit lower than the S&P 500 average. With a healthy operating margin of 21.7% GE looks well-positioned to deliver its growth targets. Moreover, the stock offers a nice 3% dividend yield.

Strategy and Competition

On Thursday, GE raised its industrial sales growth forecast to 10% which sent shares up around 3%. In the report, the US economy was doing “OK” according to CEO Immelt, while China was “not that bad” and Europe remained uncertain. GE’s infrastructure division especially has been doing well, and the company expects double-digit EPS growth for 2013 as well. Focusing on cost-cutting and smaller acquisitions, the firm also aims to reduce its outstanding share count to pre-crisis levels.

Of course, it isn’t only smooth sailing for this industrial titan, as it faces stiff competition from various companies. In the wind turbine segment, Siemens (NYSE: SI) has a fairly clear edge over its American competitor, and GE expects a sharp decline in this segment going into 2013. In fact, Siemens offers GE direct competition in a number of divisions, and for those looking to get into the European market, the German blue-chip has a slightly more attractive valuation than GE with a P/E of 16.6x.

Philips (NYSE: PHG), a Dutch competitor, has been doing a lot better this year after a period of disappointing earnings. Philips competes with GE mainly in the Healthcare division, a high-margin segment in which GE still has a considerable market share. Additionally, Philips is priced rather dearly at about 25x earnings and remains bogged down by European debt woes.

Caterpillar (NYSE: CAT), GE's largest competitor in the industrial equipment segment, remains an interesting stock to my mind, and is also priced reasonably at the moment. Also, earnings have been coming in pretty good recently. However, none of these competitors have the sheer size and diversification that GE offers. As such, General Electric seems like the better bet. The greatest risks for GE as well as its competitors are a slowdown in global recovery, reduced infrastructural spending and negative Forex translation.

Conclusion

The bottom line is that GE is a massive, well-funded blue-chip company that currently sits more or less on par with the market in terms of valuation. After the crisis, earnings have consistently come in strong, beating expectations and raising the outlook for 2012 and 2013. With a 3% dividend yield, the company is appropriate for income as well as capital growth investors, assuming the firm can achieve its EPS targets in the coming quarters.

Interested in Additional Analysis?

For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's --infrastructure leader--. At the same time, you need to be aware of the threats to GE's portfolio. To help, The Motley Fool offers comprehensive coverage for investors in a premium report on General Electric, in which their Industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now. 


DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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