General Electric: Great Company but too Expensive

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

General Electric (NYSE: GE) has recovered nicely since its financial business caused the share price to plummet from above $40 to a low of $5.72 in 2009 (would’ve been nice to buy there, but who doesn’t wish they bought more stocks in March 2009?).  In the almost four years since the low, GE has recovered nicely.  The shares are trading around $21, and they increased their dividend in 2011 and 2012, paying a once-again respectable 3.6% annual yield. With the company due to report earnings on Jan. 18, investors will be looking for signs that the recovery is continuing, especially in the troublesome financial business, as well as signs that the company’s other businesses are continuing to grow.

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General Electric does business through six segments, and derives 47% of its revenues from the United States.  The Energy Infrastructure segment (31% of revenues) produces gas turbines, wind turbines, solar technologies, nuclear power plants (through joint ventures with Hitachi and Toshiba), as well as other products for energy-related businesses.  The Aviation segment (13%) makes, sells, and services engines for military and commercial aircraft.  The Healthcare segment (13%) makes a variety of medical imaging products.  Transportation (4%) makes diesel locomotives, motors and drive systems for a variety of applications, and generators.  Home and Business (6%) makes consumer appliances such as refrigerators, as well as lamps and light bulbs.  In addition, GE has entered into a partnership with Comcast (NASDAQ: CMCSA) to pool the assets of NBC Universal with those of Comcast’s cable networks, under which GE retains a 49% stake in NBC Universal, and Comcast owns the other 51%. 

Finally, the GE Capital segment (33% of revenues) consists of all of the financing units of GE.  These include Commercial Lending and Leasing, Real Estate, Consumer Finance, and Aviation and Energy Financial Services.  Combined, the financial units have assets of $461 billion.  The financial health of the unit has significantly improved since the financial crisis, and in May the company announced that they could take cash out of the financial units again to pay dividends to investors.  The Federal Reserve, which has been supervising GE Capital since July 2011, agreed that the company’s state had improved.  Although the company is in better shape, GE capital has been shrinking its business and asset base, particularly by dropping risky real estate assets.  During the earnings call, pay attention to any new information the company reports on its asset reduction progress.  Their goal was to reduce assets to $425 billion by the end of 2012.

In terms of valuation, I must say that GE seems to be a bit on the expensive side right now.  The stock currently trades at 16.8 times TTM earnings, a significant premium to its post-financial crisis average of 13.1.  Although some of the recent move up can be attributed to the demonstrated improved fundamentals of the company, I don’t believe this high of a valuation is warranted.  First, the company has far too much debt to be trading at such a premium, and in fact has a 77.1% debt-to-capital ratio, significantly higher than peers.  Other conglomerates have far lower debt, an example being 3M (NYSE: MMM), with a ratio of 25.9%, and it has $3.68 billion in cash and only $4.84 billion in debt, for a net debt of only $1.16 billion.  GE has a nice pile of cash ($131.9 billion) but has a staggering $453.4 billion in long-term debt. 

In conclusion, I would wait for a better buying opportunity in GE.  Although I certainly believe in this company long-term, and its businesses are more diverse than some investors’ entire portfolios, I would wait for a better entry point.  If the market reacts badly to the earnings report on Friday, you may just get one!


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends 3M Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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