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Dow Jones S&P 500 NASDAQ 10-Year Note
10,441.12 1,109.18 2,206.91 35.96
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DOWN
10.88
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Dow Jones S&P 500 NASDAQ 10-Year Note
10,441.12 1,109.18 2,206.91 35.96
Oil *
73.55
DOWN
10.88
UP
1.25
UP
5.86
DOWN
0.07
10 Yr
3.60%
SPDR Gold
111.59
-0.10%
+0.11%
+0.27%
-0.19%
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RealMoney.com : FaceOff - Arne Alsin


GE's Priced for Perfection

By Arne Alsin
Special to TheStreet.com
11/29/2001 08:55 AM EST

I'll agree that General Electric (GE: - news - commentary - research - analysis) is a great company with great products and a great history. I'll even concede that General Electric is America's single greatest franchise -- but that doesn't make it a great stock.

For the frugal investor, at least, GE stock is just too pricey. Sure, the business is safe, but the stock is not. From 1991 to 1996, General Electric traded consistently at around 15 times trailing earnings. Now it trades at more than 30 times earnings, more than twice the previous norm. And that is 30 times peak profit margins, not 30 times depressed, recession-type levels.

The hype and enthusiasm for General Electric reminds me of a similar enthusiasm a few years ago for a couple of other big-cap "must-owns" -- Coca-Cola (KO:NYSE - news - commentary - research - analysis) and Gillette (G:NYSE - news - commentary - research - analysis). After pricing in 15%-20% perpetual earnings growth, investors were disappointed when both companies ran into a series of problems.

I said in a column last December that "there are only two kinds of companies, companies with problems and companies that are going to have problems." GE is priced as if it will never have major problems. But it will.

Here are some potential problems facing General Electric in the near term:

  • Aircraft Engines (18% of operating profits): Boeing (BA:NYSE - news - commentary - research - analysis) recently said that a complete turn in the airline business could take three years. GE's engine business won't recover until late in this cycle. First, the airlines must regain their footing while they fly schedules that are about 20% smaller than pre-September. Then the capacity that was shuttered in September and October has to be brought back online. Only after that capacity is absorbed will a replacement cycle be initiated -- until then, the engine business of GE is problematic, at best.

  • Power Generation (21% of operating income): Last year's growth in this business segment is not sustainable. Power prices have not stayed high enough to justify rapid development of capacity. Supply and demand are more in equilibrium now, and the power price curve reflects this stabilization.

  • Pension Income (almost 10% of operating income): There's a lot that can go wrong here. After a multidecade run in equities and bonds, the 9.5% rate of return expectation seems high. The equity portion of the pension portfolio has to do very well to make up for the well-below 9.5% that bonds are returning these days. Could pension expense, instead of pension income, be a part of the GE income statement in the future?

  • The Law of Large Numbers: GE has grown from a $50 billion market- cap company to a company worth over $400 billion over the last 10 years. As companies grow ever larger, it becomes more and more difficult to allocate capital to investments that yield as much as prior investments. Asking a company of this size to continue growing at a 15% rate is probably asking too much.

  • Multiple Compression: After reviewing several years of financial statements, I feel like I've tried to get my arms around an elephant. This baby is big and it's complex. What strikes me is that this company is slowly morphing from an industrial company to a financial company. GE Capital is the most impressive of GE's business segments, responsible for a growing percentage of profit every year (last year, it accounted for 41% of the company's profits).

    But here's the rub: Financial companies don't command premium valuations. GE now achieves rates of return on capital similar to that of top bank/financial/insurance companies -- but the stock is priced at twice the average PE multiple for leading financial companies.

    • According to one database, 16 out of 16 analysts covering GE rate it a buy. I think it is fair to say that every conceivable positive is priced into GE stock. If you believe as I do, that investing with the consensus is a certain prescription for mediocrity, then this is a stock to avoid.


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    Dow Jones S&P 500 NASDAQ 10-Year Note
    10,441.12 1,109.18 2,206.91 35.96
    Oil *
    73.55
    DOWN
    10.88
    UP
    1.25
    UP
    5.86
    DOWN
    0.07
    10 Yr
    3.60%
    SPDR Gold
    111.59
    -0.10%
    +0.11%
    +0.27%
    -0.19%
    		Data delayed 20 minutes

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    Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM had no positions in any equities mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to arne@alsincapital.com.
    Read our conflicts and disclosure policy.
    Order reprints of RealMoney.com articles. Top


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    Sorry, the page you requested could not be found

    Sorry that you couldn't find the page you wanted.

    Here are a couple of ways that can help you find that information successfully.

    Content Search:

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    (Stocks, ETFs, Mutual Funds)

    TheStreet Directory

    Dow Jones S&P 500 NASDAQ 10-Year Note
    10,441.12 1,109.18 2,206.91 35.96
    Oil *
    73.55
    DOWN
    10.88
    UP
    1.25
    UP
    5.86
    DOWN
    0.07
    10 Yr
    3.60%
    SPDR Gold
    111.59
    -0.10%
    +0.11%
    +0.27%
    -0.19%
    		Data delayed 20 minutes

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    Latest Headlines