Does the GE belong in your portfolio? By: Lou Ambio General Electric (NYSE: GE) traces its beginnings to Thomas A. Edison, who established the Edison Electric Light Company in 1878. In 1892, a merger of the Edison General Electric Company and the Th
LK GEO 1
By: Lou Ambio
General Electric (NYSE: GE) traces its beginnings to Thomas A. Edison, who
established the Edison Electric Light Company in 1878. In 1892, a merger of the
Edison General Electric Company and the Thomson-Houston Electric Company
created General Electric Company. GE is the only company listed in the Dow
Jones Industrial Index today that was also included in the original index in
1896, and is the only company that was one of the top ten largest companies at
the turn of the century, which will yet again have that claim.
The company is currently the world's second largest corporation and has been
experiencing substantial growth, despite their incredible size. Their CEO Jack
Welch is known to be the world's most successful business leader, and he has
been very successful in growing GE. In fact, he was quoted as saying, "Yes, GE
has become a very big company, and with the growth initiatives we have under
way, we have every intention of becoming a lot bigger."
GE is a diversified services, technology, and manufacturing company with a
commitment to achieving worldwide leadership in each of its businesses. To gain
this leadership, their strategy revolves around four key growth
initiatives----Globalization (of every aspect of the Company), Services (a high
technology effort to improve the performance our customer's installed equipment
base), Six Sigma Quality (a disciplined methodology of eliminating defects from
products and processes), and e-Business (the Internet based revolution that
with it brings enormous opportunity). GE operates in more than 100 countries
around the world and employs 293,000 people worldwide, including 163,000 in the
United States.
General Electric's Aircraft Engines division is the world's largest producer of
large and small jet engines for commercial and military aircraft. It also
supplies aircraft-derived engines for marine and industrial applications and
provides aviation services. Throughout the 1990s, more than 50% of the world's
large commercial jet engine orders were awarded to GE or CFM International, a
joint company of GE and Snecma of France.
Their Appliances division is one of the largest manufacturer of major
appliances in the world, producing Monogram, Profile, GE, RCA and Hotpoint
brands as well as several private-label brands. Products include: refrigerators
and freezers, electric and gas ranges, microwave ovens, washers and dryers,
dishwashers, disposals and compactors, room air conditioners, and water
purification systems.
Capital Services, a wholly owned subsidiary of GE, is a diversified financial
services company that creates comprehensive solutions to increase client
productivity and efficiency. Its operations consist of 28 distinct businesses
in the areas of Equipment Management, Consumer Services, Mid-Market Financing,
Specialized Financing and Specialty Insurance, and include global operations in
Europe, Asia and Latin America.
General Electric's Industrial Systems is a leading supplier of products used to
distribute, protect, operate and control electrical power and equipment, as
well as services for commercial and industrial applications. Major products and
services include circuit breakers, switches, transformers, switchboards,
switchgear, meters, relays, adjustable-speed drives, control and process
automation systems, a full range of AC and DC electric motors and comprehensive
technical engineering and power management solutions.
General Electric also wholly owns NBC. NBC is a global media company with
broadly diverse holdings. NBC owns and operates the NBC Television Network, as
well as thirteen television stations. In the United States, NBC owns CNBC,
operates MSNBC in partnership with Microsoft, and maintains equity interests in
Arts & Entertainment and The History Channel. NBC also has an equity stake in
Rainbow Programming Holdings, a leading media company with a wide array of
entertainment and sports cable channels. Internationally, NBC owns and operates
CNBC: A Service of NBC and Dow Jones in partnership with Dow Jones & Company in
Europe and Asia. NBC also holds equity stakes in CNET, Talk City, iVillage,
Telescan, Hoover's and 24/7 Media. Also, some of their Internet assets will be
merged with Snap.com and Xoom.com to create NBCi, the first publicly traded
Internet company integrated with a major broadcaster.
Their Lighting division supplies lighting products for global consumer,
commercial and industrial markets. Products include incandescent, fluorescent,
high-intensity discharge, halogen and holiday lamps, along with portable
lighting fixtures, lamp components and quartz products. GE also manufactures
outdoor lighting fixtures, residential wiring devices and commercial lighting
controls.
GE's Plastics is a world leader in versatile, high-performance engineered
plastics used in the computer, electronics, data storage, office equipment,
automotive, building and construction, and other industries. GE Plastics
components include GE Silicones, GE Superabrasives, GE Electromaterials, GE
Specialty Chemicals and Polymerland, a wholly owned distribution subsidiary.
General Electric's Medical Systems is a world leader in medical diagnostic
imaging technology, services and health care productivity. Their products
include computed tomography (CT) scanners, x-ray equipment magnetic resonance
imaging (MR) systems, nuclear medicine cameras, ultrasound systems, patient
monitoring devices, and mammography systems.
Power Systems is a world leader in the design, manufacture and service of gas,
steam and hydroelectric turbines and generators for power production, pipeline
and industrial applications. Power Systems also provides nuclear fuels and
services. Nuovo Pignone, GE's Italian manufacturing affiliate, also produces
turbines, pumps, compressors and related equipment.
Finally, General Electric's Transportation Systems manufactures more than half
of the diesel freight locomotives in North America, and its locomotives operate
in 75 countries worldwide. Other products they produce include passenger
locomotives, diesel engines for marine and stationary markets, electrical
propulsion and control systems for rapid transit cars, motorized electric wheel
systems for large mining trucks, and advanced railway signaling and control
systems.
Jack Welch, the company's CEO and CEO of the century, will not tolerate any of
the divisions performing in a simple average fashion. He demands that each of
General Electric's divisions compete as one of the top two in their field. If
they do not, they are spun off or sold by General Electric.
However, GE's valuation can still be questioned. Does GE deserve a premium
because of their great management and history of success, of course, but not
one of this stature. Taking into consideration General Electric's earnings
growth and the businesses that they are in they could conceivably trade at 25
times earnings, through the fact that they are indeed GE, then they could trade
at 30 times forward looking earnings. (1.24*30=37.20) This puts their stock
price at $37.20 or at about 70% the present stock price.
It should also be noted that a big portion of General Electric's earnings and
revenue are generated through GE Financial, which of course is interest rate
sensitive. If other companies are being punished for the sole reason they are
in the financial industry, why should General Electric?
Furthermore, a large part of GE's premium is based upon their management and
eventually Jack Welch will retire and this date continues to get closer and
closer. GE has yet to name a successor and the company is basically without a
leader.
About two months ago the market got excited when GE beat analyst estimates by a
penny, however over the long run I do not believe that the market can
continually get excited about a large diversified company beating low earnings
estimates by a small margin.
Simply, trading at 42 times forward looking earnings with long term growth of
only 14% GE is looking rather pricey.
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