General Electric Must Address Finance Unit

General Electric (GE Quote) may need to shrink its financial unit if it wants to recapture the flagging confidence of investors, who have cut the conglomerate's share price in half over the past year.

GE appears to be interested in addressing concerns about its GE Capital financial unit, but details thus far have been scarce. Nick Heymann, an analyst with Sterne Agee, believes the stock market has been punishing GE over GE Capital worries, assigning the stock a price-to-earnings ratio that is more typical for a financial company than an industrial one.

Indeed, an analysis of Bloomberg data by TheStreet.com, suggests Heymann has a point.

I compared GE to 25 other large financial and industrial companies, using Wednesday's closing price.

Three years ago, nearly all of the 25 large financial and industrial companies I looked at traded at a much higher multiple than they are trading now, based on Wednesday's closing prices to analyst-estimated 2010 earnings. (I tried trailing 12 month earnings, or 2009 estimates, but the last year has been so crazy the multiples are all over the place). GE is no exception: It fell to 12.55 from 19.91.

GE Multiple Looking More Like a Financial Company P/E Ratio 2006 P/E Ratio 2010 (Est.) Berkshire Hathaway 27.3 14.9 Tyco 20.63 11.8 Emerson Electric 20.23 15.31 Danaher 20.21 16.49 ITT Corp. 20.12 12.08 General Electric 19.91 12.55 Raytheon 19.12 8.74 Siemens 18.7 10.72 3M 18.67 13.33 AIG 18.1 5.87 United Technologies 17.69 11.44 Textron 17.58 9.45 Credit Suisse 16.83 12.64 Honeywell 15.92 11.42 Caterpillar 14.3 21.26 Wells Fargo 13.96 13.38 JPMorgan Chase 13.73 11.35 Ingersoll-Rand 13.06 12.56 Citigroup 12.57 N/A* Eaton 12.56 13.82 Goldman Sachs 11.96 10.17 Morgan Stanley 11.9 9.28 Met Life 11.32 7.53 Bank of America 11.23 11.34 Hartford Financial 10.89 2.61 Deutsche Bank 10.75 7.96 Source: Bloomberg *2010 Estimates not available

What remains constant, however, is that industrial companies tend to trade at higher multiples than financial ones. Both three years ago and using 2010 estimates, the companies with the five highest multiples were all industrials. Three, Berkshire Hathaway (BRK-A Quote), Emerson Electric (EMR Quote) and Danaher (DHR Quote) made the top five during both time periods.

The bottom five changed a bit, though both then and now they were mostly financials. Deutsche Bank(DB Quote), Hartford Financial (HIG Quote) and Met Life (MET Quote) were constants in the cellar.