For some crazy reason, 28 different analysts now have “buy” recommendations on General Electric (NYSE:GE) — according to MarketWatch, this is the most since 2008. But should you, the intrepid investor, care? As far as what analysts say regarding buy and sell, absolutely not — these guys are only good for providing earnings estimates. However, should you care about the company’s earnings? Yes!
When I wrote about General Electric back in October, as part of the “Should You Buy The Dow” series, I pointed out that GE really is the ultimate conglomerate. General Electric has its fingers in appliances, aviation, electrical distribution, energy, health care, lighting, oil & gas, rail, software & services, business and consumer finance, water and — well, just about everything
. GE isn’t just a bellwether of the economy, but the poster child for the Dow Industrials, and it should be a part of your core holdings in a diversified portfolio.
So just how good are these earnings supposed to be, and what does it say about the company, the market and the economy? Analysts are pegging year-over-year growth at an astonishing 22% — 38 cents per share vs. 31 cents. If earnings come in as expected, we’ll want to drill down by segment and make certain they are performing as expected. They can’t all be going gangbusters, but that’s the beauty of GE — diversification allows for certain segments to drag while others do well.
But is everything perfect at General Electric? Not necessarily. Those earnings are not the result of top-line growth. In fact, revenue has been declining at GE for some time. It peaked at $181.5 billion in FY 2008, but then got clocked by the financial crisis. In FY 2009, revenue fell to $155.3 billion, down to $150.2 billion in FY 2010, and is projected to come in at $149.3 billion for FY 2011.
Sure enough, like most companies, GE has been slicing expenses. Cost of revenue fell from $83.7 billion in FY 2008 to an estimated $72 billion this year. SG&A declined from $42 billion to an estimated $37 billion over the same period.
The question naturally arises — will revenue pick up again?
What we see is that the revenue deterioration has slowed considerably. A company can only cut expenses for so long. Still, if you buy analysts’ estimates that project $2.48 per share for 2015, and a premium P/E of 15 is deserved for a company that generated $20 billion in free cash flow in the trailing 12 months, then you get a $37 target — or almost a double from here.
That means there’s plenty of room for error. Tack on a 3.6% dividend yield, and that still makes GE a buy in my book.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.
