General Electric Company (GE)

Around April 15th 2008, 256-point drop in the Dow, precipitated by a surprise earnings miss from General Electric (GE), reminded investors that this remains a volatile, high-risk stock market. GE's stock tumbled 12% on Friday after the company reported a sizable first quarter earnings shortfall ($0.44/share versus expectations of $0.51).

GE's current 3.7% dividend yield is roughly equal to the interest on the richest savings accounts. Moreover, in today's volatile market GE is relatively safe, sporting a β of only .8, trading within about 10% of its 4-year low and at a P/E of about 15 - the very low end of its 10 year range.

General Electric (GE), one of the largest and most respected companies in the world, has seen its shares drop nearly 24% from its 52-week high of $42. In April alone, shares dropped from $38 to $32, a 16% decline precipitated primarily by continued weakness in the financial markets. GE’s Q1 2008 earnings, announced on April 11th 2008, came in below both analyst and management expectations, missing the mark by nearly 14%. Blood in the Streets A certain investor once said that those who seek to invest intelligently should “buy when there’s blood in the streets.” Heeding this advice has served this particular investor well. In fact, it has made him the richest person in the world, and he goes by the name of Buffett. Warren Buffett. (Not to be confused with James Bond, although the similarities are striking.) See, Mr. Buffett believes that the price of a stock both rises and falls faster than the value of the underlying business. Thus, when blood is spilled, as it has been for GE, it’s a pretty safe bet that it was an over-reaction.

Now, don’t get me wrong, the Q1 results were pretty bad. Net profit and earnings fell 4% and 12% quarter-over-quarter, respectively. CEO Jeff Immelt, who – as recently as early March – re-affirmed prior guidance, is being raked over the coals for the underperformance. But it wasn’t all bad. Revenues rose 8% from Q1 2007, and strong global growth – 22% – provided hope that it would weather a significant downturn in the US economy. So if there’s a silver lining to be found, strong global growth in the Infrastructure segment would be it. A History of Excellence But let’s take a step back and take a birds-eye view, if you will (or even if you won’t), of the global powerhouse that is GE. Throughout its 115 year history, GE has had its ups and downs but it also has consistently increased shareholder value. (look at the prior reason)

The GE news was significant in several respects. GE is the second largest stock in the U.S. (only Exxon Mobil (XOM) is larger) and has long been considered a barometer of the U.S. economy due to the diversity of its business lines. GE has businesses in a multitude of sectors, including industrial equipment, health care, finance, energy, consumer electronics, and media.

Historically, GE has been a model of earnings consistency; the company last missed earnings in the third quarter of 2005, and then it was only by a penny. The size of GE's first quarter earnings miss (7 cents) is notable in and of itself, as is the fact that the weakness was highly concentrated late in the quarter, evidently surprising GE and leaving the company no time to guide down expectations in advance of the earnings report.

GE attributed the earnings shortfall primarily to its financial businesses; the company's CEO stated that "the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairment." But there was weakness in other key GE business units (e.g. industrial and medical) that were simply reflective of a weak economy.

The GE earnings miss was not the only data point on Friday signaling a recessionary economy. The University of Michigan reported that its Consumer Sentiment index fell to a new 25-year low, dropping to a level not seen since 1982, which is not surprising given declining household net worth (on account of falling home and stock prices), $111 oil prices, and a weakening employment market.

Markets are likely to remain choppy and volatile over the coming fortnight as the bulk of first quarter earnings reports are released. We expect that, on balance, such reports will contain more negative than positive surprises. It will be instructive, however, to observe how investors react to the coming earnings news.

Given the heavy pessimism that now exists, which suggests that expectations are quite low and that there is a lot of liquidity on the sidelines, it is possible the stock market may hold up reasonably well in the face of bad news and rally on any good news. Psychology could conceivably shift towards the notion that the first quarter will represent the trough in corporate earnings, and that the worst of the housing and credit crisis is behind us. We don't share this view, but it may come to predominate for a period of time.

One of the main knocks on GE is “earnings quality.” Analysts have knocked them over low tax rates and this past quarter, their financial engineering (or lack thereof). One of the complaints is that much of their other business comes from asset sales (some of which didn’t come off this past quarter, hence the Q1 disappointment) and so there is an aspect of uncertainty. But a quick look at the past 5 years shows that GE has averaged $22B in free cash flow. Keep in mind this is based on operations (FCF = OCF - CapEx). Tallying items classified as “sale of business” or “sale of fixed assets”, I get a 5-year avg average of $14.5B from these sales so it’s not as if GE is utterly dependent on exits to run their business. And if you are going to criticize GE as a pseudo-financial company, then apply that standard across the board. How many financials can borrow money with a AAA rating, have access to cash flow many levels removed from the credit crunch and don’t have liquidity issues to the same extent as other financials?

Through dividends, which have been increasing steadily since 1962, stock buybacks ($1 billion worth in Q1, 2008) and earnings growth, GE shareholders have been treated very well. The financial markets are in unchartered waters right now, but they will emerge from the crisis and so will GE. In a few quarters when all this has blown over, GE will continue along the same path it has been for over a century. And you’ll have pocketed some seriously sweet dividend payouts. In the interest of full disclosure, the author of this article does not hold any positions in any of the companies mentioned.

To be honest I blew in on GE. When shares sat around $7 and $8 I fiddled on buying more shares but decided to wait due to the uncertainty I had about it. With shares today over $11, look like I let 50% run by me in a week and a half.

Will I run out and buy now? No.

I still think both GE ans the market as a whole now are due for a pull back. The good news is I am more convinced that GE will be just fine. When the pullback comes, I will be ready to buy this time.

If it never comes, oh well. At least the shares I already own are making some money...just not as much. I guess the lesson here is to trust yourself?

On December 4th, 2008 I took a 43.9% loss (including dividends and excluding commissions) on General Electric (GE) stock by selling it for $18.08 / share. While I still love the company and all they do, I now see GE Capital as a much bigger liability than I could imagine when I bought GE stock back in February. In addition, I now expect GE's NBC Universal subsidiary to loose a significant amount of ad revenue in Q1 2009. Infrastructure spending and investments in alternative energy, touted by President elect Obama as solutions to the country's current predicament, should help GE grow their revenues, but none of this is likely to help GE's books until Q3 of 2009. Furthermore, I don't expect the overall market (as measured by the S&P 500) to find its bear market bottom until at least the summer of 2009. And GE stock's β has recently increased to equal that of the market. All of this is making me think that I should be able to pick up GE stock at an even more attractive price level next year.

Apart from the main reasons, there are various other factors which point at GE being a great buy: 1) GE stock is significantly oversold, indicative of a bottom.

2) GE insiders have started buying shares in the open market.

3) GE can borrow at decreasing costs, while most competitors have to pay more.

4) The writer's strike is finally over and NBC Universal can contribute an increasing share to GE's profitability.

5) Expect GE's under-appreciated Healthcare segment to improve performance – there is pent-up demand.

6) GE will grow foreign revenue, especially in emerging markets – China Olympic Games projects are especially important.

7) GE Energy is the only US based company that has the technology to build a nuclear power plant and has the most advanced design for a safe nuclear power plant. Reservations have to be made, the money will roll in eventually, not all the plants will be built and GE might have to share the revenue with other possible partners, but the growth potential here is huge for GE, estimated to increase revenue by atleast 10% (huge considering GE has revenues of a shade less than $50 Billion).

With the announcement of the eventual sale of NBC to Comcast, GE has finally initiated a process that will allow it to focus on the businesses it does best - core manufacturing businesses like engines, healthcare, and energy. NBC has been struggling for some time, its cable business accounting for more than 60% of segment profit. GE readily admits in its annual report that NBC's television broadcast business "continues to be challenged by the effects of a difficult economy."

GE is expected to bank $8 million in cash from Comcast as a result of the transfer, and more is to follow as Comcast takes more share in NBC. GE should be able to take this and invest in projects that generate much higher returns than its NBC unit.

Despite the dour reports permeating the air travel world, GE Aviation's strong 2008Q4 results helped prop up the company in its earnings release. GE Aviation contributed to Q4 2008 net income $1.16 billion for the Technology and Infrastructure segment, an increase of 21 percent over 2007, compared to an overall decrease of net income of 44%. Revenues for GE Aviation were up 2 percent.

GE also has leading edge geothermal products – the way of the future for commercial heating in extreme climates, as well as leading edge wind turbines as well as a range of solar products. Granted that they catch only 12% of the energy at present, the efficiancy rate of the solar panels has been steadily increasing and is expected to commercialization very soon.

n addition, Pickens has placed a $2 billion order with General Electric (NYSE: GE) for 667 of its wind turbines that can produce 1.5 megawatts of electricity - part of the $10 billion “Pickens Plan” for alternative energy and for wind power to make up 20% of U.S. energy needs. Eventually, that will rise to 1,000 megawatts - enough to power 300,000 homes. And Pickens plans to pump another $6 billion into GE’s coffers for turbines that will power the 4,000-megawatt Pampa Project. As he recently stated: “We’re paying $700 billion a year for foreign oil. It’s breaking us as a nation, and I want to elevate that question to the presidential debate, to make it the No. 1 issue of the campaign this year.”

GE's current 3.7% dividend yield is roughly equal to the interest on the richest savings accounts. Moreover, in today's volatile market GE is relatively safe, sporting a β of only .8, trading within about 10% of its 4-year low and at a P/E of about 15 - the very low end of its 10 year range.

In Q2 2008, GE's orders grew 30% more than shipments, increasing its backlog during this period. This strong demand is largely caused by the international infrastructure boom being driven largely by the BRIC countries- in spite of slow economic growth in the US and Western Europe. This trend should continue and spur continued demand for GE's products, replacement parts, and service contracts.

GE is one of the market's most consistent performers. At $35, it boasts an attractive 3.5% yield and trades at a P/E ratio slightly above 16, below its long term average. Given that GE is well positioned (through its diversification and global operations) to weather a slowing economy, its shares may outperform the broader market. The company has a market cap of 335 Billion, and for the past five years, has steadily increased its revenue YoY, earnings per share, dividends and per share book value, yet its share price has gone literally nowhere.

GE's main segment is its financial segment, so it may be a stretch to equate GE's troubles with the broader economy at large. The earnings miss was largely predicated on writedowns and missed targets in the financial segment. But the healthcare segment also disappointed significantly, making it difficult to dismiss this as solely a credit crunch phenomenon.

My sense is that they would do well to divest themselves of NBC, which is poorly run from my view in the cheap seats (just go to the CNBC website, which can't seem to update podcasts, or MSNBC, which can't stream video properly). The financial segment seems a bit of a black box. Healthcare apparently is vulnerable and faces regulatory issues. Everyone loves their infrastructure and energy segments but apparently those can't pull the train.

Immelt had been under a low-pressure cooker to do something about GE's stock price; after this miss, I imagine the heat will be turned up and if things don't turn around soon, his position will be threatened, which would be a negative in my mind. But at some point, the stock's got to move up or he will be gone.

The current turbulence in 2008, is just noise in a crazy market. In the intermediate to long term, GE will grow its business and increase its dividend at a steady pace. My quick DCF analysis shows GE is undervalued by at least 20%. Will this stock double in the next 2 years? Probably not but if they can get back on track, there’s no reason we won’t see $40 again in the relatively near future and if the market really tanks, you’ll get a chance to buy a nice dividend yield and wait it out. Even in a “post-American-superpower” world, GE will be a prominent player so we should have some cushion against the weakening dollar.

With the firm's phenomenal fourth quarter 2010 earnings, GE is now back on track as an industrial power. According to JP Morgan,

"We believe [the fourth quarter] marked the death of GE as a financial and its rebirth as a late cycle industrial stock. Like most others, it’s now not so much a matter of if but when orders inflect, and while the story had been migrating in this direction, with this quarter it’s now the overwhelming top driver to the OW thesis—GE remains a top pick for 2011."

Jeff Immelt said GE exited 2010 "with significant momentum" and set expectations for continued earnings growth and a return to revenue growth in 2011. GE's orders rose to the highest level since 2007, and its order backlog now stands at $175 billion, which should drive significant growth next year.

The losses at GE Capital are now behind us, with profit excluding extraordinary charges nearly doubling to $3.3 billion in 2010.

GE's investment in this growing green trend is timely and profitable. Their recent $1.5B+ contracts in Oregon and China are evidence of this.

When you go down to your local store how many light bulbs are made by GE? I would wager to say that a good portion of them. When countries look to buy turbines for power plants I bet they come and ask GE to put in a bid. When jet liners or trains need engines GE powers them all.

This is reality of the company GE makes or is involved with companies that make something that we all use everyday. When GE is doing well the world is doing well and I think that even with the unrest and the awful disaster we have seen in the past few months we are still on track to grow the world economy. So even if you don't like the U.S. for business and think GE is to heavily tied to that look at the opinion page about GE on S&P or any other reputable advice agencies and you will see that 49% of GE's business isn't domestic.

if that isn't a bet on the world I don't know what is.

Didn't Jeff buy a significant amount of shares in the company? That looks pretty bullish. I believe the stock just made a move to the upside. Their involvement in energy should boost the stock further.

                                        N.

GE will rise with the economy and the market.Also its operations are becoming more streamlined and more responsive to the world's critical needs.It leads in the multi faceted medical field. It is in the forefront of water technology. It leads the way in environmental preservation and of course GE leads the way in alternative energy sources. Lastly GE is on the cutting of innovations which continue to enhance our quality of life.

GE owns MSNBC which has been promoting OBama starting with the time of his campaign for the election and they still overtly support him by way of a lack of any sort of scrutiny. Also GE would be the main player in the the tax and trade bill before congress.

General Electic a company I have followed and purchased for years is undervalued for many reasons. I have watched areas in the US grow wind farms using GE Technology. I posted news on one that has grown in Bennington, New York. Florida to New York and when I drove through this area was amazed at what I saw there. GE is growing business, in healthcare technology, equipment, and services to help hospitals make money. I don't think the public really understands the scope of GE, and the profits it generates.

GE is currently survives as a parasite on its former good reputation. It is a dying company, which invests heavily in its image rather than internal growth. Its turbines are inferior to all the major competitors (such as Rolls-Royce). Its appliances are inferior to all the major competitors (such as Whirlpool). All the novel things are not done by the core GE facilities, but rather purchased at steep price, which hurts GE bottom line, but bode well with creating artificial image. Don't be fooled by advertisements. Dump the GE stock before everybody else wise up.

What more to say? Even if the share goes down at this point a bit where else can you get this kind of return?