Getting The Best of Both Worlds In Stocks

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

Conglomerates have the best of both worlds: they have a diversified reach on the macroeconomy and can remain focused on accelerating growth through synergistic overlaps. The problem many times is that the riskiness of one segment, such as finance for GE, causes investors to devalue other assets. In my view, the best way to look at conglomerates is to consider investments and how they relate to the core business right now. With this philosophy in mind, I review 2 conglomerates below.

General Electric (NYSE: GE): A Takeover Rumor & Other Reasons To Buy

GE carries a substantial economic moat by virtue of ranking within the top 10 of most valuable companies, according to Forbes. GE recently purchased Avio, an Italian aviation company previously owned by Cinven, for $4.3 billion, or 8.5x  2012 earnings. Avio is a producer of commercial and military jet components. The continued increase in dividends by 12% to a yield of 3.5% communicates an optimistic outlook on the future. Now that the GE Capital crisis is behind the company, investors can now start to focus on the upside, like the double-digit earnings growth that Citi is forecasting.


GE has invested more than $800 million in manufacturing in the US, and it’s rumored to be considering buying out Weatherford (NYSE: WFT) due to its global footprint and cheap stock price. With the shale gas “boom” leading to more discoveries than production growth, oilfield service stocks are, in my view, overly discounted from a myopic market that is bearishly focused on short-term natural gas weakness. At just around book value, Weatherford would already drive significant EPS accretion from just share buybacks alone--an outright buyout could would be even more synergistic. Since GE is heavily invested in energy, it could also vertically integrate through the takeover. It should be noted that GE is more directly targeting for natural gas with its $11 Million 5-year investment plan for production. GE has taken other steps to diversify its energy investment. The company recently signed a $394 million agreement with a Brazilian wind company, supplying them with 230 wind turbines. 

GE now is interested in investing up-to $100 Million in the so-called “Industrial Internet”, which refers to a secular shift toward greater technological efficiency--a transition that GE believes will add $15 trillion to the global economy by 2030.

3M (NYSE: MMM): Confidence Or Core Erosion?
3M, the massive producer of over 55 000 products, is now ranked amongst Bank of America’s Top 10 favorite stocks for the new year. It is focused on realizing 9-11% EPS growth, 4-6% organic top-line growth, and over a 20% return on invested capital. It is further pushing to increase R&D spending to 6% of sales--an indication that management believes in its own execution.

With that said, even 3M's management came to the conclusion that 7-8% its revenue growth was a “stretch.” Its third quarter revenue of $7.5 billion came with $130 million less than expected. Since the economy is now weak, like other companies, 3M is looking to take this advantage for better acquisitions. So, on second thought, maybe 3M doesn't believe enough in the "core" business to thrive in a more competitive tech landscape? If too much is put into takeovers and R&D then why should investors be any more confident that future business will be any more sustainable?

The tech conglomerate trades at a respective 15.2x and 13.8x past and forward earnings. Assuming expectations are met, 2016 EPS will come out to $9.25. At a multiple of 15x, this translates to a future stock value of nearly $140. Discounting backwards yield a present value that is at nearly a 10% discount to the prevailing price. Thus, while 3M may have an impressive growth trajectory and focus, there is a downside variable that could come into play if earnings fails to keep up as expected, which has been the case in recent quarters anyway.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. 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. Is this post wrong? Click here. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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