General Electric: A Solid Long-Term Investment
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General Electric (NYSE: GE) is a multi-business firm that has been successful in “bringing good things to life.” It has come a long way from a simple machinery company to grow into a diversified group that includes a prominent financial services unit. The company’s revenue stream emanates from its multiple segments on the technology and machinery front. On the financial side, the company’s GE Capital division offers commercial loans and leases, home loans, credit cards, personal loans, and other financial services. Owing to its diversified sources of cash flows, we place a buy rating on GE. While the current earning multiplier is trailing high, we expect it to stabilize around 10.86 once the impact of recent acquisitions is neutralized. We expect that the firm will continue to post tremendous profitability on account of its existing and newly acquired ventures.
Key Thesis Points
1. GE has had a very cost efficient year, in that its cost of goods sold has decreased. Its operating expenses are also lower in FY 11 than in FY10, thereby increasing its gross profit margin to well above the industry average. Even the company’s net profit margin is higher than the benchmark. Both these statistics show that GE is outperforming the industry as a whole. Therefore, we are confident that GE will be a profitable company going forward as well, especially if it continues operating with lower and lower costs. The most recent net income for the firm stood at $12.97 billion compared to a profit of $5.3 billion for rival Siemens (NYSE: SI) and a loss of $915 million for competitor Koninklijke Philips Electronics (PHG). The firm’s gross and net margins remained high at 41.2% and 9.8% compared to SI margins of 28.6% and 5.8%.
2. Management efficiency, measured via income per employee ($47,123), revenue per employee ($478,894), and inventory turnover (5.9), are all at levels higher than the industry standard. Being able to convert inventory into sales more effectively than a set benchmark shows the firm’s ability to sell more, which translates into a more efficient sales force. At the beginning of last year, GE reorganized its technology infrastructure segment into three segments: aviation, healthcare and transportation. In April 2012, GE Healthcare acquired SeqWright, followed by the acquisition of Xcellerex, a supplier of manufacturing technologies for the biopharmaceutical industry, and most recently, it acquired XPRO. These acquisitions are likely to subordinate existing revenues, augmenting the bottom line going forward.
3. Long term debt has been paid back, which shows GE’s ability to service its debt with sufficient cash on hand. Net receivables have decreased, showing that the previous period’s credit sales have been collected upon in the following period. As a consequence, cash and cash equivalents have increased, some of which have been invested in short-term investments, it is safe to assume. Retained earnings have increased, at the back end of which net income has increased, primarily due to controlled costs.
GE is a modest growth stock with price-to-book value of 1.69x, a current PE ratio of 15.81, and a forward PE multiple of around 12. We expect GE to earn around $1.55 a share in 2012. The firm’s beta is 1.5, which explains the volatility profile of the stock placing it slightly above the market. This is not unusual for a firm like GE which has many varied segments as part of its entire scale of operations, i.e. a conglomerate firm. Going forward, based on strong fundamentals emanating from cost efficiency, healthy cash flows, and a high EV/EBITDA, we value GE at $22.50. Billionaire Ken Fisher and Warren Buffett are also bullish about the stock. Ken Fisher boosted his stake in the stock by 38% during the first quarter. We like GE as a long-term alternative to 10-year Treasury bonds.
This article is written by Nawazish Mirza and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M 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.