With earnings season almost behind us, we will soon be able to resume evaluating core businesses without the daily headline distractions that follow after every major company reports. We wanted to take a look at the upside and downside of some key sectors for the economy to see where key stocks in each group can trade.
First up for review are conglomerates. Covered here are General Electric (GE), United Technologies Corp. (UTX), 3M Co. (MMM), Honeywell International Inc. (HON) and Berkshire Hathaway (BRK-B), with analysis on where these stocks are valued in relation to each other and which offer the most upside versus current targets for the year.
With a market cap of $172 billion, General Electric (GE) is still the behemoth of the United States even though it has lost much of its former glory. GE’s biggest sin right now is that it is effectively still thought of by many as a bank inside a conglomerate. Otherwise, it would not have slid from $40 down to under $6.00 before a major recovery came in 2009.
The big issue at GE is the reshuffling of its business portfolio, and it is getting back to something less extreme in the financial operations. Whether the NBC deal with Comcast (CMCSA) is able to go through will open up some additional capital, but it will more importantly allow the company to be viewed as focusing on core operations. There was a time that GE was going to be exiting some of its appliances, but the economic crash killed any chances of that happening. Then there is the dividend that was cut last year. With all the waves of companies increasing their dividends so far, and 3M (MMM) and United Tech (UTX) raising dividends again, the dividend issue is likely to come up as summer nears. An increased dividend is likely to draw in some of the shareholders who want to be paid. Thomson Reuters has estimates for 2010 at $0.99 EPS and $1.20 EPS for 2011, so it trades at roughly 16-times expected earnings. If GE can stay on track and manage to keep surprising to the upside on earnings, then GE is likely closer to $20.00 at the end of 2010. Analysts already have a target north of $19.00.
United Technologies Corp. (UTX) held up better than most in the recession, and its shares snapped all the way back to above $70 before the pullback in recent weeks. The company is almost as diversified as GE and competes against it on many fronts. Thomson Reuters has estimates at $4.62 EPS for 2010 and $5.28 for 2011, so a $68 share price puts it 14.7-times this year’s expected earnings. That also makes it the value stock of the conglomerate sector. With a $62 billion market cap, it trades much closer to 3M than to GE. Interestingly enough, the company is actually more like GE if you back out GE’s finance operations. One issue that has held the company back is a lack of earnings surprises. Analysts have a price target north of $77, implying 13% upside to today’s share price around $68.00. It recently hiked its dividend, a show that it expects solid earnings to continue. The difference here is that United Tech is the “value stock” of the group. If investors get a bit more defensive, then there may be more upside to the $77 noted above.
3M Co. (MMM) managed to avoid the mudslide seen elsewhere during the recession despite the stock sliding from $80 to $40. It has come all the way back up. The company was also recently able to increase its dividend yet again, which marked a continued dividend hike strategy. The market cap here is $57 billion, but with estimates at $5.12 EPS for 2010 and $5.68 EPS on 2011, it trades just over 15-times earnings. The question is whether 3M can keep surprising to the upside on earnings. As the stock has come all the way back up from lows, 3M may be deemed by the investment community as offering less leverage to the upside. Analysts have an average price target around $94.00. Unfortunately, 3M may have to consider another acquisition to get shares much higher than analyst targets.
Honeywell International Inc. (HON) may be the forgotten conglomerate. Because it is perceived as being more focused on aerospace and defense, it often gets overlooked. If you will recall, GE tried to buy it, but that deal was blocked by the EU in 2001. With Thomson Reuters having consensus estimates of $2.38 EPS for 2010 and $2.89 for 2011, HON trades at about 16.6-times this year’s expectations. At $39.50 today, the average analyst price target is $45 to $46 a year out. The problem is that Honeywell earnings generally come with few real surprises. That leaves a potential for less upside to the numbers. The company hosts its annual investor day on Feb. 22, so we’ll have to see if the company can offer more upside before making any bold or drastic price predictions on top of the available analyst data.
What about Berkshire Hathaway (BRK-B)? It has always been more of a financial stock, but the recent BNSF buy makes it more of a conglomerate and less like a mutual fund. Due to the recent price swing of the S&P 500 addition and due to the closure of the BNSF being less than a week old, throwing on a financial target for Berkshire and Buffett today is not the same as other conglomerates, particularly as there is a greater chance of profit-taking after it ran up 13% into the S&P 500 Index addition.
