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General Electric - Thoughts From 10th and Main

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October 11, 2010 – Comments (2) | RELATED TICKERS: GE

We maintain a fairly large watch list, which at last count contained the names of 2559 companies, 67 of them foreign companies.

Because we have such a large watch list, it becomes very difficult to decide which worksheets for which companies, we should update.

Years ago when we first assembled our watch list, we decided to follow the outline on Yahoo. There was no particular rhyme or reason why, we just believed that while slightly different than the rest of the business world, Yahoo’s business structure would be around for many years to come.

To remedy which companies to update everyday, we go to the Business Section of Yahoo, and see which sector had the largest gain for the day.

Within that sector are numerous industries, and once we know which sector had the largest one-day gain, we drill down in that sector to determine which industry had the largest one-day gain.

From there we are able to see which companies in that industry had the largest one-day gain. Generally we will update three or four companies in the industry with the largest one-day gain.

Updating our watch list in this manner keeps things dynamic and allows a reasonable blend of updated worksheets, since it is simply impossible to update every company on our watch list.

Recently, the sector with the largest single day gain was the Conglomerate Sector, gaining 2.72% for the day.

The Conglomerate Sector is unique because it contains only one industry, the Conglomerate Industry, which is comprised of 34 companies.

Of those 34 companies, 11 are publicly traded. Of those 11 publicly traded companies, nine are on our watch list, and of the nine on our watch list, only one is within our Buy range.

So this week, the company that we think investors may want to consider, is General Electric Company (NYSE: GE). 

Basis 

Financial information presented in this report for Frequency Electronics, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 29, 2010. 

What They Do 

General Electric Company is one of the largest and most diversified technology, media, and financial services corporation in the world.

The company offers products and services ranging from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing, media content, and industrial products, and serves customers in more than 100 countries while employing more than 300,000 people worldwide.

The company was incorporated in 1892 and is headquarted in Fairfield, Connecticut. 

Short-Term Investment 

The stock closed recently at $17.12, with resistance at $19.70, a 15% increase from a recent close, and support at $16.43, a 4% decline from a recent close.

The stock price had been in a general declining pattern since mid May, but in more recent days has reversed course somewhat with the Stochastic now moving well into overbought territory.

Additionally, the MACD seems to be settling with a very gradual move to the upside, which should keep the stock price trending upward over the next several sessions. 

Long-Term (5 year Hold) Investment 

On the positive side, the company’s Current Ratio, Quick Ratio, Cash Ratio, and Free Cash Flow, are all what we consider investment quality.

On the negative side, the company simply has too much debt. Considering the size of GE, having lots of debt may not seem like a big deal, and certainly the company is able to service the debt it has, but to us, $472 billion is a lot of debt.

The company did manage to reduce its long-term debt during FY09 by almost $111 billion, which we applaud, but note that almost $0.12 out of every gross sales dollar was spent on interest payments.

And while that may not seem like a great deal to many investors, to us, especially in today’s highly competitive business environment where company’s are looking for any advantage they can garner, spending $19 billion on interest payments just seems a bit excessive to us. 

Valuations 

Based on our review of the company’s most recent annual financial information, our Reasonable Value Estimate for the stock based on a 5-year hold is $32, with a Buy Target set at $19, a First Sell Target set at $38, and Close Target set at $40.

Coupling the financial metrics we consider important as our hedge against risk, with the amount of debt the company has, we think a more conservative Buy Target of $14 is appropriate. 

Final Thoughts 

The company has evolved from bringing good things to life to Imagineering, and in the years to come will no doubt move into many different facets of business with new and innovate products.

Over the next 5 years, there is simply no telling what demands the world will place on the company and what products the company will introduce to meet those demands.

Certainly replacing the standard electric light bulb with light emitting diodes (LEDs) will add to the company’s lighting market share, and the world’s need for conventional, nuclear, and green power will keep the company moving toward innovation on that economic front, which is certainly good news for investors.

But in the end, at least to us, none of that matters, since in the end it comes down to our own personal economy, and one very simple question. Is the stock worth today’s $19 price tag?

Since we believe price determines return, we think now is the time to start a position, while we still have a few dollars the government has yet to tax us out of. 

Wax

2 Comments – Post Your Own

#1) On October 11, 2010 at 11:24 AM, EnigmaDude (94.22) wrote:

Interesting analysis.  I tend to agree with your thinking and initiated a small position in my personal IRA account with some shares that I bought for $16.30.  I definitely see this as a long-term (5+ years) investment and expect GE to grow the dividend as they reduce debt.

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#2) On October 11, 2010 at 8:04 PM, wax (97.08) wrote:

Enigma;

We're with you! We even wonder if our target price of $40 isn't a bit on the low side? The company has many many irons in the fire.

Wax

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