An Excellent Play On The Economic Recovery
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you believe as I do, that the economy is in a slow, but steady recovery mode, there are many ways to play this turnaround. One option would be to buy transportation companies that would benefit from increased demand. You might also buy an oil or gas company, as increased demand would help this industry too. Maybe the banking industry will turn around because of improved credit quality. However, there is one way to get exposure to all of these industries at the same time, buy General Electric (NYSE: GE). GE gives investors a piece of the transportation, oil & gas, financials, and much more in one share.
One Big Company? Not Really
Over the years I've heard a lot of people say that they don't believe in GE's growth prospects because the company is too big. Which is harder to believe? One company, with eight divisions growing by 11%, or eight smaller companies growing by 11% each? It's nothing for investors to buy eight different stocks expected to grow earnings by 11%, but because it's all wrapped up into one ticker there is somehow a problem? I'm sorry, but that doesn't make sense.
There is a similar situation occurring at competitor United Technologies (NYSE: UTX). United Tech. operates everything from a climate control division, to aerospace, to an elevators unit under one umbrella. The main difference between GE and United Tech. over the last few years has been the presence of GE Capital.
GE Capital was heralded as the growth driver for GE before the Great Recession, and then condemned as a huge problem during the recession. Now that GE Capital is back to making money, and is a smaller part of the whole, investors are okay with this division again. It's amazing how quickly the market can change its mind.
3 Divisions That Should Be Growth Drivers
There are three different divisions of GE that are not only performing well today, but have strong growth prospects going forward. The company's oil & gas division was a particular star in the current quarter, with revenue up 11% and profits up 14%. Given the constant need to explore and develop new oil & gas reserves, GE is an indirect play on this expanding industry.
The second division that looks particularly attractive is the aviation unit. Aviation is the second largest industrial unit in GE, and reported revenue up 11% and profits up 22% in the current quarter. I've made the argument in the past, that United Tech. might be a, “Better Buy Than Boeing” as a way to play the latter's huge growth in airplane orders. However, investors could also cash in on this additional business through GE as well.
If analysts are correct, the transportation business also has good days ahead of it. As just one example, CSX (NYSE: CSX) is expected to grow earnings by nea rly 12% over the next few years, and it's not the only one. CSX's competitors Union Pacific and Norfolk Southern are expected to grow by 14.36% and more than 10% respectively. In addition, CSX gave investors a little bit of help in picking stocks by saying that an increase in energy-related markets including gas and cruel oil helped their shipment volumes. What better confirmation that GE's oil & gas business should be strong in the future, could you ask for? Since GE also has a transportation division, investors should benefit from the strength in the railroad industry as well.
More Cash And A Better Balance Sheet
If investors are looking for proof that GE might be the best industrial value, consider how much free cash flow the company squeezes out of each dollar of sales. In the current quarter, GE generated $0.09 of free cash flow from each dollar of sales. By comparison, CSX came in second at $0.07, United Tech. generated $0.05, and Boeing came in at $0.04. This clearly shows that GE's diverse business model is paying off in a very real way.
Not surprisingly, GE's better free cash flow production has led to a relatively stronger balance sheet. GE's debt-to-equity ratio is 0.60, which easily is stronger than United Tech. at 0.80. CSX and Boeing's balance sheets aren't even in the same ballpark with debt-to-equity ratios of 1.01 and 1.53 respectively.
The Best Combination Of Growth & Income
I'll admit it, I'm a sucker for growth and income stocks. However, the only sucker's bet here would be to avoid GE. On a combined basis, CSX and United Tech. would seem to offer investors a better deal. CSX pays a yield of 2.46% and is expected to grow earnings by 11.92%, and United Tech pays a yield of 2.37% and is expected to grow earnings by 13.63%. With CSX's expected return at 14.38% and United Tech at 16%, this sounds better than GE's combined potential of 14.28%. Boeing even with all of their plane backlog can't match up, with a combined yield and growth rate of 13.17%.
However, there is an important component missing from this analysis. GE is the only one of these four companies that offers exposure to many industries at once. While United Tech is diversified, they are more heavily weighted toward aerospace because of their Goodrich acquisition. In addition, GE Capital in a better economic environment would be a contributing factor that none of their competition can match. The bottom line is, buying GE is like getting eight small companies wrapped into one. With many important divisions tied to the health of the economy, this could be the best blue chip money can buy.
MHenage owns shares of General Electric 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!