Shares in General Electric Company (GE) took a sharp downturn Monday after an analyst downgraded GE stock on valuation — but then valuation is in the eye of the beholder.
General Electric has indeed been rewarded with a generous multiple as it reshapes itself into a pure-play industrial stock. After years of range-bound trading, GE stock is up 25% over the last 52 weeks. That has it changing hands at almost 18 times forward earnings.
You can certainly make an argument that such a price-to-earnings multiple is stretched for the likes of GE. Shares trade in line with the broader market.
That’s arguably a concern because, after all, once most of the financial assets are gone, General Electric is just an industrial conglomerate in a world of sluggish growth and a strong dollar. In other words, it’s not a growth stock.
Among other criticisms, Bernstein analyst Steven Winoker alighted on this fact Monday when he downgraded his view on GE stock to market perform (hold, essentially) from market outperform (buy).
The analyst points out that once all is said and done, GE is a defensive stock. Shares have been boosted by multiple expansion, but now that the economy is improving, the market is likely to switch its ardor to growth stocks and away from value. So say goodbye to any more multiple upside.
Furthermore, Winoker thinks most of the upside is already reflected in the General Electric stock price after you discount for risks such as rising competition and pricing pressure in healthcare. And the success of GE’s power and aviation businesses are already priced in, the analyst maintains.
The Buy Case for GE Stock
Fair enough, but is GE stock really all that pricey at current levels? No, it’s not a bargain anymore, but neither does it look all that expensive. Shares carry a forward earnings multiple of 17.7, but then the long-term growth rate stands at 12.4% per annum.
That’s less expensive than the S&P 500, the performance of which General Electric would mimic in a market-perform scenario. The benchmark index has almost the same forward PE as GE, but General Electric has far superior growth prospects.
Analysts project that this component of the Dow Jones Industrial Average will have a long-term compound annual growth rate of more than 12% per annum. The broader market is projected to expand at little more than a 5% rate. A lot more goes into valuation than earnings multiples, but by that metric GE has outperformance written all over it.
More importantly, it doesn’t matter what GE stock does in the next market cycle. Or the one after that. It’s a boring buy-and-hold stock.
GE is levered to the global economy, which will certainly be bigger in the future than it is today. It’s safe, with a battleship of a balance sheet. And it comes with a dividend yield of 2.9%, which is pretty good these days.
GE’s return to its industrial roots is the best thing to happen to shareholders in a long time. The investment profile is changing dramatically on GE stock, but as long as you know what you’re buying, so what?
If you’re content to stick with this name for the long haul, the current valuation isn’t going to be the thing that hurts you if something goes wrong in the future.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
