Neutral on General Electric - Analyst Blog


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We maintain a Neutral rating on General Electric Company ( GE ). General Electric's current trailing 12-month earnings multiple is 15.0x, compared with the 35.6x average for the peer group and 14.9x for the S&P 500.

Over the last five years, General Electric's shares have traded in a range of 4.7x to 19.6x trailing 12-month earnings. Therefore, it is nearly in the middle of the historical range, indicating that upside, if any, will be moderate.

However, the 16% discount to the peer group is lower than the historical average of 40%, another indication that upside will be limited. Additionally, considering the fact that GE's expected earnings growth of 12.0% over the next 5 years is almost similar to the 11% expected of the peer group, we think the valuation is justified.

GE's Energy business is poised for long-term growth. While the recently reported quarter reflects some challenges, there are some positive trends. The company expects global demand for energy production and fossil fuel alternatives to grow through fiscal 2012 and beyond, driven by concerns about global warming.

GE's Energy Infrastructure segment offers the most efficient and reliable wind turbine fleet in the world with an average utilization capacity of almost 99%. Order growth in the energy division was a very strong 15% in the last quarter, driven primarily by the 56% order growth in energy equipment.

Aviation is one of the long-cycle businesses of the company, which typically has long processing and execution time. After a weak 2009 and 2010, the aviation business of the company has been reviving over the past few quarters due to the rebound in commercial air traffic.

GE has been manufacturing new age jet engines that are in high demand among aircraft manufacturers, namely the GenX, GE90-115B engines and Leap-X. Recently, the flag carrier for the United Arab Emirates announced its intention to buy 50 long-range, twin-engine jet 777-300 Extended Range aircraft, which would be powered by GE 's GE90-115B engines. In the latest reported quarter, total orders for the aviation segment were up 14%, with Commercial engines up 14% and military engines up 15%.     

General Electric has a strong international presence. More than 50% of GE's total revenue is generated from emerging markets. GE has been selling big-ticket items such as locomotives and power turbines to India and China, and the company expects continued benefits from these regions given their faster economic growth.

General Electric generates strong free cash flow. During the latest reported quarter, the company generated over $91 billion in free cash flow. The cash flow allows management the opportunity to invest in product innovations, acquisitions and business development.

However, on the negative side Defaults on consumer loans, tighter credit markets and declines in real estate values impacted the GE Capital segment in fiscal 2010. These factors, especially GE Capital's significant exposure to the commercial real estate market, will continue to be headwinds for GE Capital's business, at least through the first half of fiscal 2012.

Moreover, in the past few quarters, GE's Industrial business has not been growing as fast as its competitors, such as Honeywell ( HON ) and United Technologies ( UTX ), which have been reporting high-single digit growth. The segment is under pressure primarily due to higher pricing, downturns in key areas such as wind turbines and higher material costs.

While the significant backlog of orders is a positive, the current market uncertainties increase the possibility of cancellations or push outs.

The company's significant international presence exposes it to currency fluctuations, political and economic disruptions, all of which can directly impact the company's profits.

GE currently holds a Zacks Rank #3, which implies a short term Hold rating on the stock.

GENL ELECTRIC ( GE ): Free Stock Analysis Report
HONEYWELL INTL ( HON ): Free Stock Analysis Report
UTD TECHS CORP ( UTX ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: GE , HON , UTX

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