GE Valuation Analysis Gets Tricky

FAIRFIELD, Conn. (TheStreet) -- General Electric (GE) has been trying to shed its image as a financial company, but it is hard to say whether investors are buying the sales pitch.

Three years ago, they bought it, assigning GE a price-to-earnings ratio of 19.91. As the accompanying chart shows, this high multiple was very similar to industrial companies like ITT (ITT) (20.12), Siemens (SI) (18.7) and Danaher (DHR) (20.21). Meanwhile, the financials, including Bank of America (BAC), Wells Fargo (WFC) and Goldman Sachs (GS) all commanded multiples below 15.

The world was a simpler place in 2006, however. Post crisis, price-to-earnings multiples for financial stocks have become tricky, since many of them still have lots of troubled loans on their balance sheets that will continue to drag on earnings into next year. That's why Citigroup (C) trades at a whopping 60 times estimated 2010 earnings. Rochdale Securities analyst Dick Bove estimates it will take Citigroup five years to wind down Citi Holdings, which contains most of its troubled assets, at a cost of $25 billion per year.

The result, then, is that the healthier financial companies, like JPMorgan Chase (JPM), and Goldman Sachs trade at lower multiples than the troubled ones, like BofA, Citigroup and Wells Fargo, because their 2010 earnings are expected to be relatively strong. In other words, investors are predicting that 2011 and beyond will be far better for Citigroup and BofA than 2010. For Goldman and JPMorgan, 2010 won't be bad, so there won't be as much room for improvement.

On the face of it, then, the fact that GE trades at more than 17 times projected 2010 earnings would seem to be a sign it is looking more like an industrial company. When I performed a similar analysis in June , GE traded at 12.55 times estimated 2010 earnings.

But it is hard to be sure the higher multiple is a sign of a more industrial-focused GE when Bank of America's valuation has made a similar change. In June, BofA traded at 11.34 times 2010 estimates. Now, it's at 19.9 times 2010 estimates.

Today's GE analysis, therefore, is far messier than it was in 2006. Then, industrials had the higher multiples. Now, financial and industrial companies are mixed together throughout the chart. In the end, we have just another indication of why there seems to be so little consensus on where GE's stock is headed.

Now, click on this link to read my analysis in June.

-- Written by Dan Freed in New York.

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