Is Generel Electric a good stock to buy? General Electric (GE) is a multi-business firm that has been successful in “bringing good things to life.” It has come a long way from a simple machinery company to grow into a diversified group that includes a prominent financial services unit. The company’s revenue stream emanates from its multiple segments on the technology and machine front. On the financial side, Company’s GE Capital segment offers commercial loans and leases, home loans, credit cards, personal loans, and other financial services. Owing to diversified sources of cash flows from various segments, we place a buy rating on GE. While the current earning multiplier is trailing high, we expect it to stabilize around 10.86 once the impact of recent acquisitions is neutralized. We expect that the firm will continue to post tremendous profitability on account of its existing and newly acquired ventures.
Key Thesis Points
1. GE has had a very cost efficient year, in that its cost of goods sold has decreased, and its operating expenses are also lower in FY 11 than what they were in FY10, thereby increasing its gross profit margin to well above the industry average. Even the company’s net profit margin is higher than the benchmark. Both these statistics show that GE is outperforming the industry as a whole. Therefore, we are confident that GE will be a profitable company going forward as well, especially if it continues operating with lower and lower costs. The most recent net income for the firm stood at $12.97 billion compared to profit of $5.3 billion for rival Siemens (SI) and a loss of $915 million for competitor Koninklijke Philips Electronics (PHG). The firm’s gross and net margin remained high at 41.2% and 9.8% compared to SI margins of 28.6% and 5.8%.
2. Management efficiency, measured via income per employee (47,123), revenue per employee (478,894), and inventory turnover (5.9), are all at levels higher than what the industry currently stands at. Being able to convert inventory into sales more frequently than a set benchmark shows the firm’s ability to sell more, which translates into a more efficient sales force. At the beginning of last year, GE reorganized the technology infrastructure segment into three segments: aviation, healthcare and transportation. In April 2012, GE Healthcare acquired SeqWright, followed by the acquisition of Xcellerex, a supplier of manufacturing technologies for the biopharmaceutical industry, and most recently, it acquired XPRO. These acquisitions are likely to subordinate existing revenues, augmenting the bottom line, going forward.
3. Long term debt has been paid back, which shows GE’s ability to service its debt and have sufficient cash to do so. Net receivables have decreased, showing that the previous period’s credit sales have been collected upon in the next period. As a consequence, cash and cash equivalents have increased, some of which have been invested in short-term investments, it is safe to assume. Retained earnings have increased, at the back end of which net income has increased, primarily due to controlled costs.
Brief Valuation
GE is a modest growth stock with Price to Book value of 1.69x and a current PE ratio of 15.81, with a 2013 forward PE multiple of around 12. We expect GE to earn around $1.55 in 2012. GE isn’t terribly cheap but it is slightly cheaper than 3M (MMM). MMM is expected to earn around $6.5 in 2012, giving it a 2012 PE multiple of 14. This is slightly higher than GE’s multiple. We prefer GE over MMM because of valuation and its higher dividend yield. The firm’s beta is 1.5, which explains the volatility profile of the stock as being more volatile than the market. This is not unusual for a firm like GE which has many varied segments as part of its entire scale of operations, i.e. a conglomerate firm. Going forward, based on strong fundamentals emanating from cost efficiency, healthy cash flows, and a high EV/EBITDA, we value GE at $22.50. Billionaire Ken Fisher and Warren Buffett are also bullish about the stock. Ken Fisher boosted his stake in the stock by 38% during the first quarter. We like GE as a long-term alternative to 10-year Treasury bonds.