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Tuesday, January 16, 2018

General Electric Co Valuation – July 2016 $GE


Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how General Electric Co (GE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): General Electric Company (GE) is a global digital industrial company. The Company’s products and services range from aircraft engines, power generation and oil and gas production equipment to medical imaging, financing and industrial products. Its segments include Power segment offers products and services related to energy production and water reuse; Renewable Energy segment offers renewable power sources; Oil & Gas offers drilling, completion, production and oil field operation; Energy Management offers technologies to electrical power; Aviation designs and produces commercial and military aircraft engines, integrated digital components and mechanical aircraft systems; Healthcare provides essential healthcare technologies; Transportation is a supplier to the railroad, mining, marine, stationary power and drilling industries; Appliances & Lighting offers appliances and a subset of lighting products, and Capital offers continuing financial services businesses and products.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of GE – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $298,321,320,071 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.69 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -51.63% Fail
6. Moderate PEmg Ratio PEmg < 20 36.78 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.35 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.69 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.88 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

GE value chart July 2016

EPSmg $0.89
MG Growth Estimate -4.10%
MG Value $0.26
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $12.85
MG Value based on 0% Growth $7.53
Market Implied Growth Rate 14.14%
Current Price $32.59
% of Intrinsic Value 12310.46%

General Electric Company does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.22 in 2012 to an estimated $0.89 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.14% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

General Electric Company scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

GE charts July 2016

Net Current Asset Value (NCAV) -$20.80
Graham Number $18.16
PEmg 36.78
Current Ratio 1.69
PB Ratio 3.35
Current Dividend $0.92
Dividend Yield 2.82%
Number of Consecutive Years of Dividend Growth 6


Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $176,186,000,000
Total Current Liabilities $104,279,000,000
Long-Term Debt $134,967,000,000
Total Assets $462,193,000,000
Intangible Assets $83,102,000,000
Total Liabilities $371,105,000,000
Shares Outstanding (Diluted Average) 9,372,000,000

Earnings Per Share History

Next Fiscal Year Estimate $1.48
Dec2015 -$0.61
Dec2014 $1.50
Dec2013 $1.27
Dec2012 $1.29
Dec2011 $1.23
Dec2010 $1.06
Dec2009 $1.01
Dec2008 $1.72
Dec2007 $2.17
Dec2006 $2.00
Dec2005 $1.54
Dec2004 $1.59
Dec2003 $1.49
Dec2002 $1.41
Dec2001 $1.37
Dec2000 $1.27
Dec1999 $1.07
Dec1998 $0.93
Dec1997 $0.82

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.89
Dec2015 $0.70
Dec2014 $1.33
Dec2013 $1.22
Dec2012 $1.22
Dec2011 $1.27
Dec2010 $1.39
Dec2009 $1.60
Dec2008 $1.86
Dec2007 $1.88
Dec2006 $1.69
Dec2005 $1.51
Dec2004 $1.48
Dec2003 $1.39
Dec2002 $1.29
Dec2001 $1.19
Dec2000 $1.01

Recommended Reading:

Other ModernGraham posts about the company

5 Most Overvalued Dow Components – July 2015
5 Most Overvalued Dow Components – June 2015
5 Most Overvalued Dow Components – May 2015
5 Speculative and Overvalued Companies to Avoid – March 2015
5 Most Overvalued Dow Components – February 2015

Other ModernGraham posts about related companies

Illinois Tool Works Inc Valuation – July 2016 $ITW
Raven Industries Inc Valuation – July 2016 $RAVN
E.I. du Pont de Nemours Valuation – February 2016 $DD
Honeywell International Inc Valuation – February 2016 $HON
3M Company Valuation – February 2016 Update $MMM
Raven Industries Inc Valuation – January 2016 Update $RAVN
Illinois Tool Works Inc Valuation – January 2016 Update $ITW
E.I. du Pont de Nemours Valuation – February 2016 $DD
Honeywell International Inc Valuation – February 2016 $HON
3M Company Valuation – February 2016 Update $MMM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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