Editors note: This article originally appeared on RealMoney on July 8
It's easy to hate
these days. Growth has sharply decelerated, the company's financial arm proved unexpectedly vulnerable to the credit crisis, management appears to lack a game plan, and the company still has more than $500 billion in debt outstanding.
But this is precisely the time to step up and look past the headwinds. Longer term, there is no reason this erstwhile titan can't regain its footing. And shares have
been cheaper. As the accompanying chart shows, the forward earnings multiple has fallen more than 30% over the last five years, and now sits below 14 for the first time in several decades.
Forward P/E Trend
Source: Company reports; TheStreet.com estimates
Looked at another way, shares traded for the same price five years ago. At that time, the company earned $1.40 a share. Earnings could well exceed $2.20 this year.
GE became a cheap stock due to seemingly poor execution and a lack of vision from the corner office. With sales growth set to fall to about 6% this year, many have concluded that the company is stumbling badly. After all, this is a company that used to be known for consistently perfect execution.
A Deeper Look
If you dig past the current headwinds, though, you can start to see where GE is going and how it will get there. Simply put, GE has built four or five outstanding business segments, all of which hold their own in downturns, and flourish in upturns.
Take GE's financing businesses as an example. The company has had to take a hit on some consumer and real estate exposure, but not nearly to the extent that rivals have. The commercial finance segment saw a 20% drop in first-quarter profits, but that was still a $1.2 billion profit nonetheless.
And with firms such as
scrambling to stay liquid, GE is positioned to become the banker of choice for many new clients that need more stable relationships.
In a similar vein, the Industrial segment generated just 1% growth in the first quarter. Recall that this is the most cyclical part of GE, and most industrial cyclical companies would love to simply tread water during downturns. Many post sharp sales drops at these points in the cycle.
Of course, with a share price that has gone nowhere in the last five years, pressures to make major changes are immense. It is precisely these moments in GE's history when malaise has yielded an important bout of soul-searching. But rather than overhauling the whole business and tossing out CEO Jeff Immelt, investors should instead hope for another round of "transformation."
Ironically, I thought Immelt had the right strategy when he took the reins early this decade. At that time, he suggested that GE shed slower-growth divisions and re-invest the proceeds in faster-growing segments. Thus, GE Water and GE Healthcare were born.
To be sure, both of those segments have had growing pains, but demographics tell it all. Clean water will likely be an ever-scarcer commodity, and an aging global population will keep us consuming more health care technology.
GE's health care unit is perceived to be under stress, as profits are down from a year ago, but they will still likely top $2 billion on an annual basis. Not a bad foundation on which to build.
For that matter, GE's Power Generation segment is rolling out 21st-century solutions to its customers, from hybrid railroads to turn-key alternative-energy systems. Convinced that traditional fossil fuels still have a major role to play? GE's Oil & Gas division boosted sales 34% in the most recent quarter while the GE Energy segment saw a 21% jump in sales.
Net/net, there are a range of strong divisions at GE, and investors are being far too myopic in judging the company as "broken." Rumors recently circulated that GE Capital might require a capital infusion. But GE's just-announced purchase of a $1 billion European loan portfolio from
would not have happened if GE thought it needed more cash.
So what will break the shares out of their funk? A moderate shakeup is likely in order. Management began that process by putting the GE Appliance division on the block. The $30 billion credit card unit is expected to be sold later this year. And it may be time for GE to shed its media aspirations.
(On Thursday, GE said it was shifting its focus to a spin-off of its entire Consumer and Industrial business, which makes the company's appliances and lighting products.)
NBC Universal generates roughly $14 billion in annual sales and $3 billion in operating profits. There appears to be little synergy between this division and any other, and the unit is firing on all cylinders: NBC, Bravo and USA are all posting double-digit gains in key metrics,
ratings in May were up 24% from a year ago, and
is gaining quickly on rival
. Strike while the iron's hot.
My colleague Steve Birenberg notes that the unit could fetch 10 to 12 times that $3 billion operating profits (or $30 billion to $35 billion prior to assigning some intra-company debt to the unit). Yet he questions whether there are buyers for such a large asset. If the media segment was sold, management could redeploy the proceeds into the next "transformation."
As noted above, the company's investments in beefing up the Water and Healthcare divisions will likely yield major gains down the road. Management could roll up another space -- especially now that EBITDA multiples in many industries have shrunk -- to provide yet another leg to long-term growth.
If Immelt wanted to take bold action, he could take the proceeds from the sale of the media division and fund a massive upgrade to current R&D investments. That kind of "moon shot" would help investors to better understand the company's still-dynamic growth potential.
GE is set to report second-quarter earnings this Friday, July 11. For investors who still believe in the company's long-term strengths, this week might create a solid entry point. Analysts think that it likely that GE at least met estimates, since they did not warn of weak results at quarter's end as was the case three months ago. Moreover, the company will be coming up against comparatively weak quarterly results from the second half of 2007, which should help to show relatively robust performance in the third and fourth quarters this year.
And odds are increasing that GE is shaping up to roll out some new "transformative" strategies. Immelt can see the sharks circling and is wise enough to take a proactive set of measures to eliminate any sense of "drift" in the company.
Source: Company reports; TheStreet.com estimates
Looking for another reason to buy? The recent selloff has boosted the dividend yield above 4%.
GE's rebound may take time to materialize. That juicy dividend can provide you with CD-boosting income while you wait. And with the dividend already so strong, income-oriented investors are likely to support shares in any further selloff that takes the yield yet higher.
(Peter Garcia contributed to this article.)
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.