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ModernGraham Valuation: General Electric (GE)

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Company Profile (obtained from Google Finance): General Electric Company (GE) is a diversified technology and financial services company. The products and services of the Company range from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing and industrial products. It serves customers in more than 100 countries. In June 2013, American Realty Capital Trust IV Inc announced that it has closed on the acquisition of 377 primarily net lease retail properties as part of its previously announced portfolio acquisition from certain affiliates of General Electric Co’s GE Capital. In July 2013, General Electric Co’s GE Oil & Gas completed its acquisition of Lufkin Industries, Inc. In August 2013, General Electric Company completed the acquisition of the aviation business of Ario S.p.A.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value $3.77
MG Opinion Overvalued
Value Based on 3% Growth $19.27
Value Based on 0% Growth $11.29
Market Implied Growth Rate 5.70%
NCAV -$11.56
PEmg 19.89
Current Ratio 2.20
PB Ratio 2.18

Key Data:

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $421,787,000,000
Current Liabilities $191,716,000,000
Total Debt $226,872,000,000
Total Assets $661,438,000,000
Intangible Assets $92,250,000,000
Total Liabilities $538,746,000,000
Outstanding Shares 10,117,370,000

Earnings Per Share – Diluted

2013 (estimate) $1.47
2012 $1.39
2011 $1.23
2010 $1.15
2009 $1.03
2008 $1.78
2007 $2.20
2006 $1.99
2005 $1.72
2004 $1.59
2003 $1.55
2002 $1.52

Earnings Per Share – Modern Graham

2013 (estimate) $1.33
2012 $1.28
2011 $1.31
2010 $1.44
2009 $1.64
2008 $1.91

Conclusion:

General Electric is an interesting company because its financials are strong, but the earnings growth has been exceptionally weak over the last 10 years.  In fact, the company’s EPSmg (normalized earnings per share) has dropped from $1.91 in 2008 to $1.28 in 2012, and we estimate it will remain low for 2013.  This lack of earnings growth gives great concern, and caused the valuation of the company using the ModernGraham valuation model to be very low.  The company may be suitable for both the Defensive and Enterprising Investor, but it appears to be significantly overvalued.  Mr. Market is implying General Electric will grow at a 5.7% rate, but it’s unclear whether that will be the case.

What do you think?  Is General Electric overvalued or does Mr. Market have it right?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in General Electric at the time of publication, and had no intention of purchasing a stake in the next 72 hours.

Photo Credit:  Andrew Magill

8 thoughts on “ModernGraham Valuation: General Electric (GE)

    1. Thanks for the comment. Keep in mind that price changes do not reflect intrinsic value. The fact that the stock has done well over the last 2 years does not reflect how it will do in the future.

  1. Great website with useful info.

    GE’s evaluation is a little bit more involved though:

    They are spinning off GE Capital which really dragged them down during the financial crisis.

    Their order backlog as of Jan 2014 is over 200 Billion.

    Thanks for making the Graham formula so user friendly!

    1. John – The problem is that Graham taught to base your investment decisions on the demonstrated historical achievements of the company. Any deviation from that involves inherent speculation which makes your calculations less reliable and allows human emotion to enter, creating an increased likelihood of error.

      So while I suspect that GE will see improvement, I’m not willing to let my expectations affect my decision until I see the actual results of the change.

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