Emerson Electric Co. (NYSE:EMR) CEO David Farr is betting on a “manufacturing renaissance” in the United States. He cites oil and gas leading to cheaper energy costs as one catalyst, explaining that “from the oil and gas renaissance you’re going to see a lot of investments going in — very technology-based investments, typically,” continuing by stating that (in reference to manufacturing) “now what we have left [in the U.S.] are the very high-end technology-based jobs.”
Farr believes that a high level of innovation and technology will “rebuild some of the manufacturing base that has left the country,” but also made it clear that “It doesn’t mean you’re going to see a lot of jobs flying back here.”
Old industry, new technology…
Industrials are indeed integrating themselves with technology. Honeywell International Inc. (NYSE:HON) is also betting on technological innovation in relation to manufacturing. According to Darius Adamczyk, President and CEO of Honeywell International Inc. (NYSE:HON) Process Solutions,
“The manufacturing plant of the future will be more than just machine-to-machine connections; it will also connect data and people better and faster… Companies need to get to first production faster than before, they have to do more with less manpower, and they face increased safety and security threats. They need more than just our technology – they also need service consultancy, data visualization and analysis, and collaboration tools.”
Sound familiar? This is because General Electric Company (NYSE:GE) has also been working on its own version of connecting data and people faster. The company is planning its industrial Internet network, which will blend industry with Internet, and will be receiving over $500 million in investment money from General Electric Company (NYSE:GE), according to CEO Jeff Immelt. Eventually everything from jet engines to refrigerators may be connected and made more efficient if GE’s vision is made true.
Like Farr, Immelt sees that energy and technological innovation has huge growth drivers domestically. Immelt also has his sights on China. General Electric Company (NYSE:GE) envisions up to $3 trillion in accumulated growth opportunities for Chinese companies by 2030 due to the “industrial internet”.
Technological innovation (such as the industrial internet and shale technology), as well as the oil and gas-led “manufacturing renaissance”, will likely benefit the industrials immensely–so how to invest?
Valuations– taking size into consideration
First off, market capitalization must be noted, as General Electric Company (NYSE:GE) is well over twice the size of both Emerson and Honeywell combined:
| P/E | Forward P/E | Dividend (Yield) | Market cap (in billions) | |
|---|---|---|---|---|
| GE | 17.23 | 12.78 | 0.76 (3.30%) | $240.10 |
| HON | 19.89 | 13.91 | 1.64 (2.10%) | $60.53 |
| EMR | 19.85 | 14.36 | 1.64 (2.90%) | $40.23 |
Data provided by Yahoo! finance 06/06/2013
GE is also cheaper, both now and going forward in relation to earnings. General Electric Company (NYSE:GE) pays out the highest yielding dividend. So is GE the no-brainer? There’s usually a catch when things seem too good to be true. Digging a little deeper, the high-yielding dividend paid by GE hasn’t been as safe as that of its competitors.
While the past doesn’t dictate the future, this is definitely something to keep in mind. So why the cut? Much of it had to do with the financial crisis.
GE as a financial stock?
Unlike Emerson and Honeywell International Inc. (NYSE:HON), General Electric Company (NYSE:GE) has GE capital, which is a financial services arm. This caused much more pain during the financial crisis for GE than competitors for obvious reasons. Regulators recently voted to propose dubbing certain non-bank financial companies “systemically important”, which will most likely include GE. If this legislation becomes reality, GE capital may have to obey things such as capital requirements and pass stress tests if they are deemed “too-big-to-fail”.
GE capital provides lending, leasing, and financial services for everything and everyone from healthcare to consumers. GE capital also recently announced that it would be providing its parent company with a whopping $6.5 billion in dividends this year. Mr. Immelt commented that:
“This announcement is consistent with our goal to reduce the overall size of GE Capital and for it to return significant cash to GE.”
GE’s financial arm also explains why the company seems to have so much debt:
Many would deem a good portion of GE’s debt (that relating to financial services) as “good debt” because it is making big money for GE capital, but when the good times turn, like in the financial crisis, debt is debt and can be very pesky to share prices and dividends. GE does plan, however, to reduce the size of GE capital and become less reliant on it in the future.
The bottom line
Emerson and Honeywell, the smaller players, appear to pay out “safer” dividends, and appear to have recovered much better than GE since the financial crisis:
They are also more expensive and offer lower yield than GE, however.
General Electric Company (NYSE:GE) looks like the best deal here from a pure valuation perspective, and if the company does indeed continue to reduce its dependence on its financing arm, it could be a steal at current levels–especially if the company remains shareholder-friendly and continues to increase its dividend. GE in the financial crisis seemed more like a rock-solid, industrial blue-chip dragged down by a drowning bank. Reducing GE Capital’s size should also reduce the chance of further share price collapses and dividend cuts. General Electric Company (NYSE:GE) is also aggressively expanding into oil and gas, which should provide ample growth in the future.
General Electric is a great turnaround story, stepping into the digital age with their “industrial internet” plans and their increasing footprint in the natural gas revolution; it is also cheap in relation to its smaller peers, which makes it a great buy at today’s levels.
The article Is GE the Best Industrial to Buy Now? originally appeared on Fool.com and is written by Joseph Harry.
Joseph Harry owns shares of General Electric Company. The Motley Fool recommends Emerson Electric Co.. The Motley Fool owns shares of General Electric Company. Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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