Sunday, February 12, 2006

Is GE Dirt Cheap?

We don't think using comparable multiples is the best or only way to value stocks, but if you do, household name General Electric (GE) looks compellingly valued:
The recent stock woes of General Electric, Wall Street darling through much of the 1980s and 1990s, is attracting interest from an unusual group on Wall Street these days: value investors. The company increased earnings at a 10 percent clip in 2005, has forecast an earnings growth rate that will be at least a few percentage points higher for this year, and has an enormous order backlog. Yet the stock hit a 17-month low earlier this week.

Although 21 of 22 analysts who cover the stock have a buy or outperform rating on GE, its shares are trading at prices that make it attractive for value investors, a breed that likes fallen angels or stocks in the midst of a turnaround. "I'm puzzled by that, too," said money manager David Dreman about GE's shares, which are trading at about 15 times its projected 2007 earnings. "It's trading at the same price as Tyco (TYC) with much better growth...people are paying 16 to 17 times earnings for 3M (MMM), which is a good company, but it is certainly not the quality of GE..." (source: Reuters)
We believe that when the credit tightening cycle ends, GE's multiple will regress to its historical norm.

Coupled with the fact that the Street is giving Immelt an overly hard time (there can only be one Jack Welch and given GE's size, achieving 10% organic growth is no easy task) as well as the fact that GE is moving out of low margin products (lightbulbs, courtesy of its industrial unit) and shifting into higher margin areas (its finance & loans unit is a true powerhouse), GE looks like a buy whenever it pulls under $35.

We are long the stock.

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