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 5 Undervalued Companies with a High Beta. 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 specific look at how General Electric (GE) fares in the ModernGraham valuation model.
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. Effective January 28, 2011, it held a 49% interest in a media company that includes the NBC Universal businesses. Its segments include Energy Infrastructure, Aviation, Healthcare, Transportation, Home & Business Solutions and GE Capital. Effective January 1, 2011, it reorganized the Technology Infrastructure segment into three segments: Aviation, Healthcare and Transportation. In April 2014, the Company’s GE Healthcare acquired CHCA Computer Systems Inc., operating room (OR) management and analytics solutions provider.
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 = 5/5
- 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 – PASS
|Value Based on 3% Growth||$21.18|
|Value Based on 0% Growth||$12.42|
|Market Implied Growth Rate||4.92%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
General Electric is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern is the insufficient earnings growth over the last ten years, but the company passes all of the requirements of the Enterprising Investor. As a result, value investors should feel comfortable proceeding with further research into the company and its competitors. From a valuation perspective, the company appears overvalued after growing its EPSmg (normalized earnings) from $1.44 in 2010 to only an estimated $1.46 for 2014. This low level of demonstrated growth does not support the market’s implied estimate of 4.92% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on General Electric (GE)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Be sure to review the previous ModernGraham Valuations of General Electric (GE)!
Disclaimer: The author did not hold a position in General Electric (GE) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.