General Electric Equity Research Report

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					General Electric (GE)                                            economically sensitive short-cycle businesses, but the rest of
                                                                 the diverse world of GE grew. Long-cycle businesses and
Buy for General Electric (GE)                                    GE Capital contribute more than 75% of GE’s revenues.
                                                                 Share Information: Market Cap $335.8 billion; Shares
Recent Price: $33.55 (as of April 19,2002), Price target $50.    Outstanding 9.94 billion; Float 9.8 billion; 64% institution
Consensus Annual Earnings Estimates: $1.66 (2002), $1.83         owned (similar to both sector, 64% and S&P 500, 60.7%)9 .
(2003)1 .                                                        Key Stock Statistics: $33.55 (as of April 19,2002). 52 week
Consensus EPS Growth Estimates: 20.2% (2002), 18.3%              high $53.55 (05/21/01), 52 week low $28.50 (09/21/02). One
(2003)2 .                                                        year return $-29.142.10 Stock price was down 16% in 2001
Intrinsic Value Estimate Range: $28.86 - $34.35 (EPS and         as compared to the year 2000 (investors who have held stock
P/E ratio model).                                                for 5 years, including 2001have received an average annual
Recommendation: In 2001, GE’s earnings (11% growth to            return of 21%)11 . Also in 2001, the lower stock price
$14.1 billion) outperformed the S&P 500 (decline of more         prompted a GE repurchase of $3.1 billion, which gave the
than 20%) by the widest margin in 25 years. GE is not a          public a sign of strong GE support from management. The
risky investment, although the beta is 1.16 currently, and is    current P/E ratio for GE is 24.72 (five-year high of 50.11,
riskier than the S&P500 as a whole3 . While there is concern     and low of 25.31), as compared to the current conglomerat e
over the change in management of the company, the                sector (26.96) and the S&P500 (30.28), which shows that the
management team appears to be solid and performing within        stock is at a reasonable price compared to peers. 2001
expectations currently. The stock price dropped in April         dividends were increased 13% (to $0.66 per share), which
14% when first quarter 2002 reported revenues fell short of      was the 26th consecutive annual increase. The dividend
analyst estimates due to a change in accounting for goodwill,    growth for GE has outperformed the S&P 500 for the past 5
which has resulted in a stock price that is currently            years12 .
undervalued4 . The 12 – 18 month price target of $50
assumes the shares can trade at a 30 – 40% premium to the                   S&P 500/GE cumulative dividend
S&P50, and that GE earns 13 – 15% on it’s free cash flow,
                                                                                  growth since 1997
which should not be a problem (25 – 30% current returns)5 .
Most of the ratios in the presented financial information
reveal that GE is a financially stable, well managed, and               150
profitable company. GE has outperformed and is expected to
outperform both the sector as well as the S&P500, and should            100
be considered a buy for most investors.                                                                           S&P 500
General Economic Outlook: The US economy was headed                      50                                       GE
into a downturn prior to the events of September 11, and
following that event, the US entered an economic recession.                0
The US markets have ended the years 2000 and 2001 with                         1997     1999       2001
negative growth. The first quarter of 2002 has been one of
high growth (over 1%, leading to a possible 5% annual
growth rate). Alan Greenspan thinks that while the economy       Risk (Beta): GE was more closely correlated with the
has rebounded, the growth seen in the first quarter of 2002 is   fluctuation of the S&P 500 prior to the events of September
not necessarily sustainable. In the short run (2002), interest   11. The beta value (1.16) for GE indicates that the stock
rates are not expected to increase more than one percentage      moves more than the S&P 500 (when the S&P 500 moves
point6 .                                                         1%, GE moves 1.16%, which is a little more volatile as
Company Profile: GE is the #1 or #2 leader in a range of         compared to sector (1.05)13 . The valuation of GE has
industries. The company produces aircraft engines,               decreased more than the S&P 500.
locomotives and other transportation equipment, appliances,      Risk (Valuation): The estimated intrinsic share value for GE
lighting, electric distribution and control equipment,           stock is $31.37 using the EPS and PE ratios model. A growth
generators and turbines, nuclear reactors, medical imaging       range of plus or minus 10% produces a range of fundamental
equipment, and plastics. The GE financial arm, GE Capital        value estimates between $28.86 and $34.35. The valuation
Services, accounts for nearly half of the company’s sales and    above is based on a five-year projection into the future, using
is one of the largest financial services companies in the US.    data as follows: expected growth rate for GE 9.13%,
Other operations include, but are not limited to, the NBC        expected market rate of return for the S&P500 12.69%, the
television network and Internet services7 . Jack Welsh, the      current one-year treasury constant maturity rate of 2.53%, a
GE Chairman for 21 years, retired in 2001. Jack selected a       beta for GE of 1.16, current GE EPS $1.36, and current GE
member of his then current management team, Jeff Immelt,         PE ratio of 24.7214 . The expected calculated stock price for
as his replacement. While there seems to be a successful         one-year from today is estimated at $36.09.
transition to the new management team, there remains public
concern over the loss of Jack Welsh and the impact to GE.        One-year comparative returns and volume (GE versus S&P
Sector and Industry: Primary sector and industry for GE are      500)15 .
conglomerates (reported herein as sector for both); Secondary
sector is aerospace and defense, and consumer products
(durables, and financial services), Secondary industry is
aerospace/defense – products, consumer products (durables)
– appliances, and financial services – commercial lending8 .
The September 11 th attack impacted profoundly two
important industries in this sector: airlines and insurance.
Further, with the collapse of Enron, entire industries have
been exposed for accounting practices, and have been
devalued or have filed for bankruptcy, causing yet another
contribution to the downward correction in the stock market.
The global slowdown had an impact on GE’s more
Financial Summary and Growth Trends: The 2001                     Financial Strength:
financial picture for GE was a success despite the challenging                           GE             Sector        S&P 500
events of September 11 and an economy in recession.               Quick Ratio            1.66*          0.73          1.11
Revenues were $125.9 billion, down 3% from 2000, but up           Current Ratio          1.71*          1.41          1.65
4% on a comparable basis (industrial revenues grew 6%).           LT Debt to             1.46           1.11          0.67
The S&P500 outperformed both GE and the sector in revenue         Equity
growth by 44%. GE outperformed the sector (8.04%), but            Total Debt to          4.25           2.91          1.03
not the S&P 500 (12.85%) for a five-year period (9.72%).          Equity
This means that GE’s revenue figures and growth are in line       Interest Coverage      2.78           4.54          7.74
with peers. Cash from operating activities grew to $17.2          *calculated values
billion (up 12% from 2000). Operating margin expanded to
19.6% from 18.9% over 2000. Current EBIT D is 30.06               Current and quick ratios for GE are outperforming both the
versus sector (23.63) and S&P 500 (20.02), and 5-year             sector and the S&P 500, which means that GE has a good
average is also good at 28.98 versus sector (24.08) and S&P       ability to meet short-term obligations. Part of the
500 (21.81). This means that GE is managing operations            performance of the quick ratio can be attributed to the
well. Return on average total capitol remained at 27%4 . This     performance of the GE inventory turnover rate (5.95), which
growth was primarily due to GE’s long-cycle businesses            is also better than both sector (6.27) and S&P500 (10.19).
(powers systems and aircraft engines) and GE Capital.             GE is managing inventory turnover well. The interest
                                                                  coverage ratio is poor as compared to sector as well as the
                          GE           Sector        S&P 500      S&P 500, which shows that the company has a lot of debt to
Re venue (TTM)            -3.38        -3.38         2.74         cover versus peers. The GE debt -to-equity ratios are higher
Re venue (5 yr            9.72         8.04          12.85        than both the sector (24%) and the S&P500 (54%). This
growth)                                                           means that GE has more debt, and as a result has higher
EPS (TTM)                 3.75         -7.68         -5.89        interest payments on that debt. This may partially be
EPS 5 yr growth)          14.31        8.87          8.29         explained by the over 100 acquisitions for the last five years
GE has very good earnings per share versus sector and S&P         the company has completed18 .
500 for both current and five-year estimates. This means that     Conclusion: In the past, GE’s earnings growth has held up
the stockholders are receiving a good return on the stock         pretty well in periods of economic slowdown, as compared to
price. GE reported first quarter earnings for 2002 on April       other industries. Despite the events of September 11, GE
11. Earnings before accounting changes were 17% higher            will be able to weather the economic storm well, given it’s
($0.35 per share) from last year’s $0.30 per share. Earnings      size, portfolio diversity, management strength, and financial
matched analysts’ expectations, but revenue fell short. The       strength (AAA credit rating). Several analysts believe that
company incurred a non-cash charge of more than $1 billion        GE’s current valuation is amply discounted to handle further
in the first quarter related to changes in accounting for         economic downturn or recognition of further insurance
goodwill (SFAS142). Due to this, actual earnings estimates        losses. GE stock total return is expected to exceed the sector
were reported to be $2.5 billion ($0.25 per share), which was     and the market over the next 12 to 18 months, even though it
down from $0.26 for the same quarter last year16 . As part of     has encountered substantial issues with the economy as well
a large cost-cutting move (1 billion from it’s Capitol            and changes in accounting practices. The current P/E ratio
division), GE recently announced that it would cut 7,000 jobs     for GE is lower (better) than of the sector, suggesting that the
by the end of 2002. This cut represents more than 2% of           stock could be undervalued at this time. The dividend yield
GE’s worldwide workforce (total cut of 19,000 persons from        has outperformed the sector as well, and is expected to
headcount in the last two years)17 .                              continue to outperform through the next five years. Revenue
                                                                  growth rates, EBITD, operating margin and earnings per
Management Effectiveness:                                         share are all currently outperforming GE’s peers, and again
%                      GE             Sector        S&P 500       are expected to continue to outperform over the next five-
RO A (TTM)             3.18           3.86          5.76          years. This is due to management effectiveness and
RO A (5 yr av)         2.91           4.62          7.94          efficiency. Therefore, I would recommend GE to be a buy
RO I (TTM)             9.98           9.09          9.33          for most investors.
RO I (5 yr av)         9.13           9.9           12.69
RO E (TTM)             27.65          22.12         16.92           Morgan Stanley Research Estimates, April 15, 2002
RO E (5 yr av)         26.18          23.53         21.5            Morgan Stanley Research Estimates, April 15, 2002
GE’s ROA is lower than both the industry average at one and
five years, but shows improvement at one-year. This means 
that GE has not used assets as well as competitors. ROI has
been lower for the five year period, but ahead of both the
sector and the S&P 500 for the one-year date. GE is       
outperforming both the sector and the S&P500 for ROE.     
Shareholder equity is being turned into profits better than
competitors. Management has also been effective in terms of
annual revenue/employee versus sector ($406,00 versus                GE Annual Report 2001
$323,657) and annual NI per employee                                 GE Annual Report 2001
versus sector ($47,190 versus $35,007). This means that GE 
has produced more return on every headcount within its     
worldwide staff. The S&P500 outperforms both GE and the    
sector for both above measure by about 65% and 60%         
respectively. This is partly due to expensive capital costs for
this sector.                                                         GE Annual Report 2001

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