This Conglomerate Is Inclined Toward Longevity
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While General Electric (NYSE: GE) still remains the largest U.S. conglomerate and arguably one of the most renowned names in the global space, a section of pundits have, for the past several years, questioned its ability to deliver utility for its shareholders. This argument is founded on the lackluster, yet steadily improving, performance that General Electric’s stock exhibited at the wake of the dreaded 2008 financial juncture. In addition, some analysts argue that Jeff Immelt, the CEO, played a key role in suppressing General Electric’s performance over the years. Indeed, the last ten years have been characterized by a lower-than-average kind of performance.
The graph below offers a deeper insight, showing General Electric’s performance relative to key benchmarks:
As detailed, General Electric has performed relatively lower than the S&P 500 and the Dow over the years. Nonetheless, what’s more notable is the distinct correlation between General Electric’s performance and the general performance in the market. This suggests that General Electric’s performance is more influenced by broader market conditions than it is by shifting tendencies in its internal environment.
With this in mind, making Immelt take the bullet for the outgoing decade is blatant finger pointing. General Electric’s performance is more reliant on macro factors and as such, shouldn’t be predominantly analyzed from a historical performance perspective. Prospective investors should look at some other compelling elements in General Electric like longevity and size. Albeit taken for granted, these are some of the factors that assure an investor that their money is not only safe but also poised to double over the years.
Rosy relationship with the government brightens long term outlook
The government is one of the high priority deep-pocketed customers in General Electric’s stable, spending millions of dollars each year. To further fortify an already solid relationship, General Electric and the government have inked a contract worth $138.3 million. This amount, which will greatly add to General Electric’s top line, will secure the conglomerate’s engineering, technical and logistics services in support of the high priority T700 series turbine engines.
To further accent this already lucrative deal, the electronics heavyweight secured a $242 million contract in February last year. The contract required General Electric to overhaul and upgrade the T701D and T700 engines. This was then succeeded by another remunerative September repair contract worth $105.2 million.
This snapshot shows that General Electric’s ability to meet the crucial needs of the army has paid off in millions of dollars. However, the monetary aspect isn’t as important as the relationship that General Electric has managed to build with the government. This not only places a deep-pocketed customer in its pool but also brightens long term prospects in an unimaginable fashion. Take a scenario where General Electric is on the brink of bankruptcy (though highly unlikely). I am sure that in the presence of the government, the management will not have to scrape the bottom of the barrel in search of a solution.
Sailing on strong tailwinds in the alternative energy segment
I believe that the alternative energy segment is the next big thing. The global population growth is bordering on a viral rate and soon, the 7 billion plus people in the world will double (figuratively speaking). This will not only put strain on the energy sector as we know it but it will also make work harder for energy bigwigs. The alternative energy segment will, at the time, be a sure goldmine. In light of this, General Electric is already dipping its toe, or may be a whole leg, into the sector. The conglomerate has joined an international consortium to buy 32 wind farms in France where it will own a bulging 40 percent stake. In an alternate deal, General Electric, MetLife and other players will establish a majority stake in a U.S. solar farm in California’s Mojave Desert.
I believe that its profound involvement in alternative energy gives it a definite edge against Phillips Electronics (NYSE: PHG), a core competitor. Why is this so? As of the moment, alternative energy is a heavy investment even for the bigwigs. Its margins provide little or no incentive and most players in this segment merely break even. In fact, government subsidies have long been argued to be the life force behind the segment. With this in mind, making significant advances into the segment will not be feasible for Phillips, which has significantly smaller cash reserves relative to General Electric.
Looking at Citigroup (NYSE: C), it only has one card to play – finance. General Electric is however more diversified and offers more security for an investor. Worse still is the prevalent sentiment toward banks. Despite the cheap prices, banks are still considered to be black boxes by many and this spells out a rather bleak outlook for the sector as a whole.
In conclusion, I believe that General Electric’s involvement in all the right places suggest that it will remain relevant for many years to come. Its close correlation with broader market conditions also makes it predictable. What is better than a predictable stock that is well positioned for growth? I contend that General Electric is a good buy, particularly at its current cheap price.
muhammadbazil owns shares of General Electric Company. The Motley Fool owns shares of Citigroup Inc and 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!