General Electric Company (NYSE:GE) is certainly a company that everyone has heard of, has a global brand name and remains a central part of American history. But does that mean you should buy, sell, hold or short GE stock? Let’s take a look.
There are many pros to owning GE stock. I think one of the biggest advantages is the sheer size and diversification of the company. It isn’t just selling light bulbs anymore! In fact, GE is operating in areas that surprised even me, and the depth to which it is entrenched in much of the world’s infrastructure is staggering.
The Power division generates power across all types of energy, from gas to nuclear. This division delivers about 20% margins and has a staggering $77 billion in backlog. GE also has a presence in renewable energy, with wind turbines, solar plants, geothermal plants and biomass power plants. Margins here are at about 7%, with $12 billion in backlog. Last year was huge for GE as it purchased Alstom, a massive $10 billion player in thermal and renewable energy.
There’s still more energy in GE, and it is oil and gas, with drilling and production systems, floating platforms, reactors and all the gear that comes along with this stuff. Margins are solid here, at about 12% with $23 billion in backlog.
Its energy management division has only 3.6% margins. Margins are 7.7% in the appliances and lighting division, the most famous of its products. Not too many people know that it has a healthcare division, as well, mostly in imaging — MRIs, CT scans and the like. That division carries 16% margins and a $17 billion backlog.
Over in Aviation, it’s all about engines, and corresponding systems and services. Aviation is a high margin business with 22% yields and a whopping $151 billion backlog. Transportation focuses on railroad, marine, mining, stationary power and drilling industries. Somebody has to make those locomotives! Again, we have a high margin division (22%) with $22 billion in backlog.
Finally, we have the capital division, which provides financial services to aviation, energy, and industrial businesses. GE is exiting the capital business by selling everything to its Synchrony Financial (NYSE:SYF) spinoff.
There are three takeaways from this rundown. First, as mentioned, GE has conquered the world. The beauty of being massive and having this degree of diversification is that it’s difficult to keep GE down, much less take it down in the first place.
Second, look at those margins. For a company that is driven by some very expensive overhead, General Electric has amazing gross margins, and net margins in the 8% to 9% range.
Third, it has hundreds of billions of dollars in revenue backlog. How many companies can say they have any backlog at all, much less hundreds of billions? That provides a degree of security.
As readers of my column know, I want lots of free cash flow. GE stock has it in spades. Coming off of operational cash flow that usually hovers around $28 billion to $31 billion, it has about $7 billion in capex, leaving it with well over $20 billion in free cash, of which it uses about $8 billion on its 3.1% dividend and a huge chunk of the rest for share buybacks.
As always, we come to valuation. All these numbers are great, but so many blue-chip stocks are unreasonably valued.
Analysts see 12.1% annualized net income growth over the next five years. I add the 3.13% yield to that, for a total of 15.2%. I then give it a 10% premium for its global brand name and another 10% for its cash flow. Thus, I’m willing to pay about 18 times earnings. We have to back out some net income from discontinued operations, and the TTM give us net income of about $7.3 billion. Ugh. That means GE stock trades around 40 times earnings.
Once again, I have to suggest that you avoid buying GE stock here at $30 per share. I wouldn’t short it, only because I short businesses that are failing. If selling would trigger a big capital gains tax hit, I would hold.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
