by Tom Taulli | February 21, 2013 1:55 pm
GE (NYSE:GE) took a huge hit during the financial crisis, but has since been getting its groove back.
From 2009 to 2010, sales fell by double-digits and the company actually had to get a $3 billion investment from Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A, BRK.B).
The company has worked hard to revamp its operations and invest in growth markets, though. In fact, GE now has about $95 billion in the bank and shares have returned an impressive 27% over the past year, bringing the stock to a four-year high.
So is it time to get into GE? To see, here’s a look at the pros and cons:
Built to Last. Over the last 116 years, GE is the only company that has been continuously listed on the Dow Jones Industrial Average. In other words, GE knows how to focus on long-term opportunities and always seems to find ways to deal with challenges. The company also has a philosophy of only focusing on markets that it can dominate.
Restructuring. Mergers have been key to GE’s growth … but it looks like the dealmaking got overheated, especially when the financial crisis hit in 2008. So the company has instead been focused on streamlining its operations, which often has meant unloading non-core assets. This was the case with the sale of NBC to Comcast (NASDAQ: CMCSA), which has resulted in a huge influx of cash. GE has also been improving the operations of its GE Capital Services division, emphasizing profitable markets, which has helped it deal with rivals like JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC).
Mega Markets. GE is poised to benefit from a variety of secular trends. Energy, for example, is seeing strong growth in North America and that has certainly benefited GE’s related products and services. The company has also been investing heavily in clean-tech, such as with wind and solar. Another big market for GE is electricity. As seen with recent disasters — such as Hurricane Sandy — the U.S. will need to revamp its brittle electric grid. No doubt, this should be a huge opportunity for GE. Oh, and the company also has a strong set of assets in the healthcare industry, like diagnostic equipment and patient record systems.
Regulation. In light of GE’s scale, the company is subject to laws across much of the globe. Many of its businesses, such as healthcare, financial services, transportation and energy, are also subject to onerous regulations which could result in injunctions and hefty legal judgments. The company is already the target of various actions to remediate hazardous wastes.
Cyclical Business. Plus, the global economy remains fragile. The U.S. recovery has been sluggish and Europe continues to be a major drag. There are also signs of a slowdown in Asia. But even if the global economy has a fairly shallow drop, this could have a major impact on the GE since the company is focused on many industries that are cyclical and involve huge investments. In other words, it is easy for customers to delay or cancel the purchases of high-ticket items like airline engines or CAT scans.
Complexity. Even with the restructuring, GE is still a highly complex organization. While the company has done a good job in managing it, there are still risks. After all, its past moves into categories like entertainment proved to be too distracting and hindered growth. Besides, with its huge cash hoard, GE may be tempted to engage in more dealmaking. One possibility is to buy companies in emerging markets. While this strategy could result in more growth, there are major risks in buying these types of companies, including threats of higher taxes, more regulations, nationalization or fraud. Caterpillar (NYSE:CAT) recently had to take a $550 million charge on a $800 million acquisition of a Chinese company because there were false disclosures, for example.
While there are concerns, GE still comes with a lot to like. Plus, even with the recent rally, GE’s shares are still trading at a reasonable valuation, with the forward P/E sitting at 12.6. And the dividend is still at a healthy level of 3.2%.
As a long-term investment, the pros outweigh the cons on this stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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