3 Core Conglomerates To Buy And Hold Long-Term
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General Electric (NYSE: GE), this country's largest conglomerate and a true proxy of the economy, recently released earnings. I always look forward to GE’s earnings reports, for while the company provides hints about its own future, it is suggesting overall economic health at the same time.
Overall General Electric increased revenue by 3% over the third quarter of 2011, to $36.3 billion. Profits came to $3.45 billion, or $0.33 per share. Adjusted profits came to $3.8 billion, or $0.36 per share, matching analysts' expectations. In the third quarter of 2011, adjusted earnings, not including the prepayment of Berkshire Hathaway debt, earnings came to $3.46 billion, or $0.32 per share.
General Electric's largest division is its Energy and Infrastructure unit. This segment had an excellent quarter, with revenues up 12% and profits up 13% from the same quarter a year earlier. This was despite depressed growth in America and Asia, and no growth in Europe. This is probably the last quarterly report before the unit is broken up into three separate operating units. The idea of this split up was to reduce bureaucratic and administrative costs by upwards of $300 million per year. The company's transportation unit and home and business solutions unit also had low double digit profit growth over the last year.
It is accurately believed that General Electric Capital led the company into the problems it suffered late last decade. In response, General Electric has been on a mission to downsize its finance arm, to a size that if it were an independent bank it would rank as the nation's fifth largest. It returned profits of $1.67 billion in the quarter, which if measured independently would have given the financial arm a return on assets of a fine 1.20%. It is ironic that the old adage of “buy low and sell high” is so hard, even for a company like General Electric. Perhaps more important for shareholders than what General Electric Capital earns is that it has resumed paying dividends to the parent corporation. Thus far this year it has returned $5.4 billion, $2.4 billion of which was in the past quarter. Still, General Electric Capital maintained a healthy Tier One capital level of 10.3% at the close of the quarter.
The current worldwide market is not easy for a big ticket vendor like General Electric. Yet the products it sells, wind and gas turbines, locomotives, jet engines and medical equipment, are such basic parts of our economic infrastructure that it is relatively insulated from short term economic swings. But it is scarcely less vulnerable than most other companies to the pending economic cliff about which we are hearing so much, Management is looking for year over year earnings growth in the low teens, and analysts have fallen in line with projections of 12.2% earnings growth over the next five years. With its reasonable PEG of 1.2, and a dividend yield of 3.0%, I believe General Electric is a core, long-term holding for many types of investors.
Honeywell International (NYSE: HON) also released a pretty decent earnings picture in its third quarter. This large, diversified manufacturer is involved with hundreds of different products, ranging from avionics and military to chemicals to home security systems.
Sales in its third quarter of 2012 were essentially even with the year ago quarter at about $9.3 billion. Profits came to $950 million, or $1.21 per share. This was a 9% advance from the same quarter of last year. The improvement was exclusively attributable to expanded margins that occurred on account of lowered costs of goods sold. Analysts had expected revenues of $9.5 billion and profits of $1.14 per share. The company credited new products and Asian sales increases as offsetting another difficult quarter in Europe.
Looking ahead, management slightly lowered its forecast for revenue for all of 2012, but further narrowed its profit forecast from $4.45 to $4.50 per share. Honeywell earned $4.05 per share in 2011. Analysts see strong, 17% growth over the next five years, driving the company's PEG down to 0.82. But for that level of growth to be achieved, I believe some recovery of the European Union is necessary. I certainly don't think the EU will be in the dumps forever, and with Honeywell's average 2.4% yield, I see it as a solid, if unspectacular, long-term choice.
United Technologies (NYSE: UTX) is another big conglomerate. Although it has not released third quarter earnings, it has been in the news the past few months. Early in the third quarter it completed its over $18 billion acquisition of Goodrich. The FTC ordered certain divestments before approving the deal, and true to that agreement United Technology sold Goodrich Electrical Systems to French aircraft-engine maker Safran. In an unrelated sale, the company divested its disappointing ownership of Clipper Windpower. The company has also gotten into hot water over improprieties in China.
The company now consists of Otis Elevators, Carrier HVAC systems, Pratt and Whitney aircraft jet engines, Sikorski Helicopters, and Hamilton Sundstrand commercial and avionics equipment, the division into which the Goodrich assets will be folded. United Technologies stands to achieve substantial cost savings from the Goodrich integration, helping lurch earnings growth to a forecast 11% annually over the next five years. It has a PEG of 1.37, so compared to General Electric and Honeywell, it appears a bit overvalued. I still believe this is a fine company whose growth should outpace the majority of other public companies over the next five years.
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.
StockCroc1 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.