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Valuing GE (It's Cheap)

by: Valuecruncher June 23, 2008 | about stocks: GE    

Valuecruncher

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With GE’s share price hitting a five-year low and analyst coverage turning negative, we thought it was time to have an objective look at the GE numbers using the interactive Valuecruncher valuation tool.

GE Valuation

GE grew revenues from US$134.3 billion in 2004 to US$172.7 billion in 2007 – an 8.75% compound annual growth rate. Our assumptions of revenues for the next three years are US$187.5 billion in 2008 growing to US$206.5 billion in 2010 – 6.1% compound annual growth. We have projected EBITDA margins increasing from 23.5% in 2008 to 24.5% in 2010.

We have used a terminal growth rate of 2.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 5% dropping to a 2% stable growth rate over the next ten years.

We have used a WACC (discount rate) of 6.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). We think this WACC of 6.5% is reasonable but recognize that the actual number could be as low as 5.5% or as high as 7.5-8%.

We used a terminal capital expenditure number of US$4.0 billion.

Valuecruncher's Valuation for GE

Our analysis incorporates the cash and debt on the GE balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$36.16 which is 32.1% above the current share price of US$27.38.

Based on our analysis, GE shares look cheap. Play with our assumptions – what does your analysis say?

Disclosure: None


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This article has 21 comments:

  •  
    Jun 23 04:42 AM
    my analysis says that the undervaluation of GE will continue for an extended period until the company demonstrates that it has a plan to free itself from the stigma of the finance arm.

    Reply
  •  
    Jun 23 05:18 AM
    No one person will hit the bottom price but your assumption about GE may be correct. At the least, it is time to "nibble."
    Reply
  •  
    Jun 23 06:26 AM
    Who is "we" and how did you arrive at voodoo growth numbers? Do you really think revenues can never decrease? How about home prices...
    Reply
  •  
    Jun 23 06:31 AM
    I agree that the share price is low at the moment ( but the low price may be justified) , however until I see how they have dealt with the almost $200 Billion of paper maturing in 2008, and at what cost?, I will keep away from GE.

    The problems with growth assumptions for GE, is that its recent growth has been based on the availability of cheap money, I cannot foresee this situation returning for at least 5 years.

    Once I have seen the level of write downs over the next 2 quarters, I will be better informed as to whether its time to invest in GE, until then I will sit on cash.

    Chris Marshall
    Reply
  •  
    Jun 23 07:29 AM
    GE is virtually bankrupt. Check out it's Cash Flow. It borrowed over $50M in 2007, over $43M in 2006 and less than $9M in 2005. Borrowings are increasing exponentially while the cash to pay for those borrowings is approaching zero. It's cash flow is coming from its borrowings. It's cash flow for 2007 was under $2M. What happens to GE as the financing and credit situation worsens?

    Debt/Equity ratio is 4, way too much debt. Where is it going to get the money to finance operations? From Bernanke?

    If you fail to understand the above then take a look at its stock price, going the way of Bear Stearns and why are investors buying so many puts on this company if it wasn't about to go bankrupt?
    Reply
  •  
    Jun 23 07:40 AM
    GE is, and will be forever dead money.
    The company collects billions of dollars or revenue a quarter, and according to the "rules" you hear people talk about, the stock should be $100 again...right?

    Wrong. Why?

    The "stock" (notice I am not talking about the company) can no longer exponentially expand it's market cap, thanks the the massive amount of shares outstanding, and the amount of money necessary to move the share price up (Psst, the same goes for MSFT, et al) It is called the laws of large numbers and it does apply to stocks.

    That is the only reason the stock has done nothing since its market cap peak 10 years ago. Do not be fooled by all the accounting explanations, Wall Street reasoning, etc.

    Ask yourself, what would you rather own:

    A stock that is 1 billion in market cap with 100 million shares outstanding and an ability to expand its market cap to 11 billion, thus giving you a 1000% return over the next 15 years,

    OR

    A stock like GE, that is already 250 billion in market cap with maybe the possibility to expand its market cap back to 500 billion, a 100% return, over the next 15 years??

    Wall Street knows, the average dumbed down american can be convinced to buy the so called "mega cap blue chips" knowing full well that the returns these massive stocks will dole out are going puny.

    BRW: What I have written really only applies to folks under 55 who are still looking for above average growth from equities. I am no dummy and know full well, older americans should not take on as much risk, thus could own the mega caps, if anything, for stability.

    Then again, don't tell that to the shareholders in C, AIG, et al.
    Reply
  •  
    Jun 23 07:47 AM
    GE is about to go bankrupt G7enn??? That might just be the most insane comment posted on one of these boards........ever! I think they have problems like everyone else. But they are definitely not going bankrupt.
    Reply
  •  
    Jun 23 09:03 AM
    g7enn wrote: "GE is virtually bankrupt. Check out it's Cash Flow..."

    You might want to look up "bankrupt." Then look up "cash flow." Then, just for kicks, see what you can find on "long term." See if you can put it all together.

    Here's a hint: 2007 earnings - $22.2 billion; 2006 - $20.7 billion; 2005 - $16.7 billion.

    Bottom line.

    "It's [sic] cash flow is coming from its borrowings."

    Really? I'm looking at cash from operations, which appears to be up some 65% in the last 5 years.

    "It's cash flow for 2007 was under $2M."

    Right. POSITIVE cash flow. Hardly the sign of a pending failure.

    "What happens to GE as the financing and credit situation worsens?"

    It continues to lose money (mark-to-market) from certain investments, and continues to generate ENORMOUS amounts of cash from operations. And at the end of this credit problem, there will be some big winners - who's to say GE ends up worse than average?

    "Debt/Equity ratio is 4, way too much debt."

    And Goldman's is over 10. Do you also think Goldman's about to fail?

    "Where is it going to get the money to finance operations? From Bernanke?"

    Pay attention. Operations generate ENORMOUS amounts of cash.

    "If you fail to understand the above then take a look at its stock price, going the way of Bear Stearns and why are investors buying so many puts on this company if it wasn't about to go bankrupt?"

    Here's a newsflash for you: for every put buyer who thinks the company's going down, there's a put SELLER who thinks the opposite. Better question: why is short interest a measly 1.2% if so many investors thought GE was in such dire straits?
    Reply
  •  
    Jun 23 09:57 AM
    So should I buy (GE)?
    Reply
  •  
    Jun 23 11:23 AM
    Banktrupcty? If GE was going bankrupt, why (Per Barrons & WSJ) have their high level VPs been buying shares in record amount? With all due respect to the negative posters above, these two items simply don't add up. And I certainly doubt GE and Immelt would be caught with their pants down 2 quarters in a row...ie-if their buying shares, then things will most likely look much better than current sentiment.

    I for one have been buying GE, again for the first time in years, due to the low price and negative sentiment, albeit in small amounts. I expect them to say the quarters not as bad as expected (for god's sake, bankurtpcy...it'll be easy to to that sentiment) and the shares to have a short pop...only to settle probably marginally higher than now (above $30) until they can show continued execution of goals over a few quarters (ie-get confidence back).

    I highly doubt the bankruptcy scenario, but if it does happen, run for the hills...on all your stocks. It'll be a giant tsunami of bad news for the market....October 1987 watch out! But I really, really doubt that would happen. Restructuring, changes...sure...along with every other financial heavy company out there...but not bankruptcy.
    Reply
  •  
    Jun 23 11:29 AM
    Very intersting article and comments. The bottom line is that GE is definitely worth owning especially at these prices we see now.
    Reply
  •  
    Jun 23 12:15 PM
    Actually, the best measure of leverage is Debt/Tangible Book. If you look at it this way, GE is currently approaching bear stearns territory at approx 36:1. If you break out GECS and look at GECS its a whopping 70:1. GECS as of Dec 31, 2007 had only 8.4 billion in tangible book value. Only a 2% decrease in its investment/fin rec portfolio would wipe out its tangible bv.

    Not that I am saying that GE will meet BSC's fate - its asset quality underlying its loans is far better than BSC's, but it is still highly levered on the GECS side.
    Reply
  •  
    Jun 23 12:26 PM
    why bother getting ahead of the business cycle... the risk reward doesn't seem to make much sense here. There is so much not known about GE's forward borrowing costs and its equity destroying write downs via tremendous exposure to cash poor customers like Aerospace and Hospitals. This is not the point in the business cycle to mess with GE... it's discounted for good reasons.

    Granted there may be 30% upside - but on a relative basis to other opportunities in the market place that's not amazing.

    GE will be a buy when they announce a break-up of the un-related businesses. They don't need to manage a portfolio of companies for the investing public or institutions... they frankly haven't done a great job re-investing and creating shareholder value.
    Reply
  •  
    Jun 23 01:35 PM
    Wow, emotion seems to be getting the better of some folks. Rational thought process should lead to the conclusion that the market is pricing GE and other similar stocks based purely on fear generated by events/headlines of the day
    Reply
  •  
    Jun 23 01:48 PM
    Obviously GE is a good buy. Personally I'm buying in, as in right now. On a 5 year time frame it will double. I also get to re-invest the dividend. Simply put, buy when it's undervalued.
    Reply
  •  
    Jun 23 06:07 PM
    If what is commented on here is valid, then I would like to hear what is the appraisal of the management that is in place now with a objective and constructed opinions. Give me your take on how you see the wisdom or not of management. Thanks for taking the time as I am a shareholder too.
    Reply
  •  
    Jun 24 05:02 PM
    hehe i can't believe you can even compare GE to BSC .... High debt looks bad now but when stuff starts clicking again (who knows when) GE will have put itself into position to take advantage of that by not hiding itself in a closet with its money......... GE is spending money to make money and every single day I see them signing some new contract to earn 100's of millions in revenue

    If you get scared during down turns in the economy and stop spending guess what your gonna be screwed when the economy turns around cause you won't be prepared, GE is spending to take advantage of the future as any good company should....... GE will also be one of the best positioned out of the downturn because of its size
    Reply
  •  
    Jun 25 11:14 AM
    Ok, Healthcare is not a cash poor industry. As far as aerospace, just because there are less tourists flying the friendly skies doesn't mean nobody is flying. There is a constant stream of jet traffic in a little place called Iraq. They have their fingers in both wind and solar. They are cutting their dead weight appliance division, which will save them money. They have emerged from the credit crisis far less injured than many others that had that much skin in the game. I think this is a winning formula down the road and the GE financial debacle is a gift to wannabe GE share buyers, with a fair dividend too.
    Reply
  •  
    Jun 26 04:34 AM
    I am looking at fundamentals and what I see is a company with shrinking earnings growth, negative cash flow and unimpressive profit margins. You are right that the P/E looks inviting (13) and I too have heard of these new technologies being researched by GE.. My fear is that conglomerates aren't good and researching effectively.. GE has 327,000 mouthes to feed and a bad economy will hurt them huge. Entering a process of layoffs always brings the stock price down.
    And though I don't think GE is a risky investment, I can't be convinced to own this company over other, more focused large cap companies who have an org chart that I, or anyone else, can understand..
    Reply
  •  
    Jun 27 09:06 AM
    I LIKE MY STOCKS AS I LIKE MY WOMIN--CHEAP! SO I WOOD BUY MORE GE SHARES IF'N I DINT ALLREDDY OWN SO DANG MENY.

    SKRUMMY
    Reply
  •  
    Jul 02 03:01 PM
    The most interesting graph of all is a 5 year track record vs the SP 500.. Immelt and his band of fearless leaders have taken a $50 stock to $25, and at this rate of progression it will be $12 in no time... The last two quarters of surprises indicates to me that the company has gotten too large to manage and the only way that stock holders will ever recover is if they split it into parts: Financial, Medical, Aerospace, Energy, Consumer Goods, etc... like AT & T did .. eventually the stockholders prospered. Where's Jack Welch when we really need him.. or at least a man with vision... I see the same old sh** being passed off as strategic thinking..
    Reply
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