GE: Powerhouse, or Dim Bulb?
Board: Value Hounds
We've discussed GE before as a possible bond-like investment, and then [for me] it rose out of my optimal price (less than $18). Now it's back, closing at $18.56 with a yield of about 3.1% and a PE of 15.
Granted, there is a LOT of the "new reality" that can impede GE. Nuclear, rail car stockpiles, consumer products, and more. But I found the following recent article and find I largely agree with it.
Heavy is the head that wears the crown. And when you're a company with a $200 billion market cap already, it seems it takes a lot to move the needle. On Friday, General Electric (NYSE: GE ) reported numbers that would have sent many a lesser stock flying:
Profits were up 21% to $0.35 per share.
Infrastructure orders were up 24%.
Revenues were down 3.5%, but only because GE unloaded its NBC Universal stake on Comcast (Nasdaq: CMCSA ) last year. But for that, revs would have risen 7%.
GE displayed lesser reliance on the finicky and problem-plagued GE Capital business, where revenues declined modestly.
And greater reliance on GE's industrial core, where contract wins for the firm's LEAP-X jet engine at Boeing (NYSE: BA ) and Airbus helped push the backlog of future business to a record $189 billion.
Meanwhile, the firm's ballyhooed assault on the energy sector is bearing great fruit, with CEO Jeff Immelt promising 17% unit volume growth this year, versus 2010. Across the company, Immelt told investors to expect accelerating sales and earnings growth through 2011 and into 2012. But how did investors react to all this good news?
They sold off GE by nearly half a percent.
We've looked at GE a couple of times and I appreciated Jack's analysis and the discussion we did here -- which values it at about $23, and it should be more than that by now. That's about a 20% reduction to possible IV now at $18.50.
BMW looked at this about half a year ago.
The whole value of CAPS is that it signals me when "things" get back in an interest range. $16 per share would be better, but I thought it might be time to see what you think now.
Reply Author: kelbon
General Electric's share price is where it is today partly because of it's debt load. When push came to shove it had difficulty paying its short term obligations back in 2008. Frankly, things aren't a whole lot better today. A little more cash in the bank, but long-term debt is still gigantic ($360 billion). Not only does this albatross put the company at risk in unusual times, but it is the reason for GE's anemic return on total capital, which tips the scales at a modest 4%.
A lot of commentators and financial publications are reasonably sanguine about GE's valuation and prospects. Me, I can't get past the fact that GE's long-term debt is over 25 times one year's net profit and consequently returns on capital are low.
What's in a name? In this case I think GE's storied past and longevity might help explain the rose colored glasses.
GE isn't a bank and it has been scaling back its financial services division, yet, a significant pay-down of debt just isn't happening to a significant enough extent.
I was bitten by this dog once. Once bitten; twice shy.
$360 billion in debt and 4% return on capital — nay, deal breaker.
But, the valuation is reasonably attractive…if you choose to strip out all the cash on the books.