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
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- 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. Â 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. Â This lack of earnings growth gives great concern, and caused the valuation of the company using the ModernGraham valuation model to be very low. Â The company may be suitable for both the Defensive and Enterprising Investor, but it appears to be significantly overvalued. Â 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? Â Is General Electric overvalued or does Mr. Market have it right? Â Leave a comment or mention @ModernGraham on Twitter to discuss.
Disclaimer: Â 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: Â Andrew Magill
Leave a Reply