Are GE Shares ATTRACTIVE at $21?
Despite General Electric’s (NYSE:GE) exposure to the beleaguered US residential and commercial real estate markets and the fact 20% of its revenue comes from even more beleaguered Europe, GE’s stock price is up 17.25% year to date. On July 20th, GE reported earnings that weren’t great yet also weren’t bad. Although the stock dropped immediately, shares have been rebounding ever since, recently hitting a new 52-Week High of $21.19.
What may have saved GE was management reaffirming full year guidance. For the quarter they reported Earnings per Share of $0.29 or $0.38 when you remove one-time charges. Analyst consensus forecast was for $0.37 per share with revenues of $36.77 billion, but the company reported only $36.5 billion.
So what’s up with GE? Is this industrial and manufacturing giant a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = Catalyst for a Stock’s Movement
European and US real estate are two potential catalysts for GE that could break either way. Right now the European debt crisis is on low simmer in the eyes of many, but if Spain or Italy ask for a full bailout the pot may boil over and GE — along with the market as a whole — will suffer. GE Capital is a real Achilles Heel for the company and the foreclosure crisis is far from resolved. In addition, commercial real estate could be in big trouble in the event of worsening economic conditions. An August 1st business headline told the sad tale of a major commercial property partially owned by GE in Hartford Connecticut — the Constitution Plaza — which went into foreclosure.
H = High Quality Pipeline
GE has a storied history of product innovation dating back to its founder Thomas Edison. They are a world leader in the development of high tech health care equipment. Their energy innovations in wind, natural gas turbines, and solar panels put them at the cutting edge of alternative energy infrastructure.
E = Equity to Debt Ratio is Close to Zero
GE is engaged in a variety of capital intensive businesses, but by any measure a debt to equity ratio of 3.57% or 357% is troubling. By comparison, rival Siemens (NYSE:SI) has a respectable debt to equity ratio of 0.48 or 48%. In fairness to GE, overall they operate in more capital intensive business segments than Siemens.
A = A Level Management Runs the Company
GE management has gotten some good press from their attempts to restructure the business to reflect core competencies. They are on a path to get out of businesses without direct impact on the company’s long standing industrial operations. Going forward they are committed to energy and manufacturing. Yet one wonders why the decision to downsize GE Capital instead of divesting it did not raise more eyebrows and lower the management grade.
T = Technicals on the Stock Chart are Strong
GE’s share price has been moving above its 20 Day SMA (Simple Moving Average), its 50 Day SMA, and its 200 Day SMA since the beginning of 2012. Both the 20 Day and the 50 Day crossed above the 200 Day during Q1. As of August 10, the share price was 3.42% above the 20 Day SMA, 6.13% above its 50 Day SMA, and 13.91% above its 200 Day SMA.
S = Support is Provided by Institutional Investors & Company Insiders
GE is 54.31% institutionally owned, but it is their 4.97% year-to-date insider transactions that bear mentioning. In short, company directors are buying shares. In August, Director John Joseph Brennan put over $400,000 on the table to buy 20,000 shares. In April, Director Alan G. Lafley spent $584,700 and change to pick up 30,000 shares, while Director Rochelle B. Lazarus bought 4,000 shares at a cost of $79,010. However, the most recent insider transaction was filed with the SEC on August 10 and shows a sale of 179,693 shares by Vice Chairman John Krenicki. The sale was through a trust. The top five institutional holders include Vanguard, State Street, BlackRock, Capital World, and Bank of New York Mellon.
E = Earnings are Increasing Quarter over Quarter
Although they have a respectable annual average earnings growth rate of 10.3% over the past ten years, over the last five quarters they have been relatively flat. Earnings per share over the last five years show a decline of 8.01%
E = Excellent Relative Performance versus Peers and Sector
GE has four principal competitors – Siemens (NYSE:SI), Koninklijke Philips Electronics (NYSE:PHG), United Technologies (NYSE:UTX), and Honeywell (NYSE: HON). If you believe share price is the ultimate measure of excellent performance, let’s see how GE compares to these other companies over the last five years. The industrial goods sector was hammered by the economic crash in 2008 and all these companies saw big drops in share price, but two have recovered and moved above their August 2007 share price. Honeywell’s current share price is up 8.35% and United Technologies is up 5.51%. Siemens dropped 28.34% and Philips Electronics dropped 23.58%. The worst performer of the group was GE, down 45.12% since August of 2007.
T = Trends Support the Industry in which the Company Operates
Energy efficiency and healthcare are two areas of the economy that will see explosive growth in the coming years as baby boomers around the world retire and the search for cleaner sources of energy and more fuel efficient transportation systems intensifies. GE has the expertise and the experience to benefit from both. In addition, they already get about 50% of their revenue from emerging markets.
GE may be on the right track, but in the face of unresolved issues in the US real estate sector, the European debt crisis coupled with the possibility of further global slowdowns and perhaps even another credit freeze, GE seems to qualify as a WAIT and SEE for most investors. If you have a touch of the riverboat gambler in you, in the long term this company is not going away.
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