Finding General Value

General Electric(GE) is on of the largest infrastructure and financial services companies in the world.  GE produces aircraft engines, oil and gas production equipment, household appliances, power generation equipment and delivers services such as consumer and business financing.  This was a very short list of the products and services that GE offers, since General Electric is much more diversified in the types of businesses it operates.  A large and diversified company, such as GE, has many different streams of income coming in from its various businesses. As a value investor, we need to figure out whether those income streams will add value to us and our portfolio.

With a dividend yield of 3.3% and a 5 year dividend growth rate of 9.8%. This is a great sign for GE, since it had been consistently increasing its dividend for over 25 years before it was cut by 66% during the recession of 2009.  Increasing dividends are a great sign that the company is confident in its future growth and that investors will be able to count on a consistent and growing income stream for themselves.

General Electric Dividend Yield

Looking through GE’s cash flow statement, we see that cash flow from operations has declined from $33.3 billion in 2011, to $31.3 billion in 2012 to finally $28.5 billion in 2013. This translates to a 6% and 9% decline in operating cash flows.  Overall, cash did increase in 2013 by $11.3 billion from 2012, but this was largely due to the sale of equity interest in NBCU LLC. The decline in cash flow from operations is a little startling, but shouldn’t cause panic for those that already have a position in GE.

GE Value

Using Guru Focus’ interactive charts, we can see a couple of things.  We notice that GE is currently trading at 1.9 times its book value.  This isn’t a terrible ratio because we could be willing to pay a premium to book value for a very solid business.  GE is also trading at 17 times its free cash flow.  For me, I find value by investing in businesses at are trading below 15 times their free cash flow.  I personally feel that it is a safe way to invest in a company that is investing in its future, generating cash for its current and future business operations, and has the ability to continue paying dividends.  GE’s free cash flow per share is currently at $1.47.  We then take its free cash flow per share and init this into Guru’s DCF model.

GE_Lions_shares_DCF

We then see that GE has a fair value of $21.68, and a margin of safety of -18%.  A negative margin of safety, priced at almost 2 times its book value and trading at 17 times its free cash flow together tell me that GE is a bit overpriced.  Although it does pay a decent dividend that continues to grow, I think it would be best for a value investor to wait until GE’s price dips.  Until then, we can search for value somewhere else.

1 Comment

  1. nycwerewolf here from GuruFocus. Great work again re GE. I have 19.15 as fair value but again ideal entry point would be at or below 6.70 & who knows whether it ever gets there. Even putting aside a more conservative view of the stock the P/E is above SPX’s. And that by itself makes it not worth the time. Debt in excess of market cap & barely enough $ in total cash vs the shares outstanding.

    I like to look at stocks with P/B, P/S & PEG ratios below the current ratio (that’s how I gauge value vs the financial stability of the company) & then I want to see if the # I get taking shares out. divided by market cap is below the ROE %. And if everything looks ok after that is it trading below fair value. Fair value for me is either the Sq. Rt. of 22.5 x EPS x BV calc or tangible book value. And I still really want to see stocks trading 35-65% below TBV rather than simply below “fair value” if that makes sense. I also follow R.C. Allen’s approach of not investing in anything where I don’t see at least 60% upside with only 20% downside risk.

    One big problem I have with GE (& many other companies in this market) is the Debt to Equity # vs ROIC. Net Income/(Total Shareholder Equity + LT Debt) = 3.72 vs D/E @ 270.31 which scary as hell. Of course if can go higher & hold at current levels for all the wrong reasons but just as with WMT not work the risk (or reward) either way. Bookmarked your blog. Happy to see another like minded soul in the investment universe lol. Right now there isn’t really anything “cheap” in this market from a LT pov. But expect higher prices because QE fore better or worse hasn’t really ended yet. You will know its starting to end once TLT is no longer outperforming SPY YTD. Until then don’t short just look for best names you can find.

Leave a Reply