Foolish Forecast: You Can't Go Wrong With GE

General Electric (NYSE: GE  ) is heading into its third-quarter earnings report in a very unusual position. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) guru Warren Buffett just stepped in with a multibillion-dollar investment in the beaten-down giant. Is that enough to turn the tide of woe, or will Tina Fey have to save the day?

What Fools say:
Here's how GE's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

General Electric

$201.9

9.4

****

Siemens AG (NYSE: SI  )

$59.0

5.7

****

United Technologies (NYSE: UTX  )

$48.3

10.8

****

3M (NYSE: MMM  )

$41.9

11.5

*****

Honeywell International (NYSE: HON  )

$26.0

9.9

****

Data taken from Motley Fool CAPS on Oct. 8, 2008.

Our CAPS Fools love GE's sector of massive industrial conglomerates. "Long term winner with short term problems," quips all-star CAPSer VoodooSaviour, and many others agree that GE is an attractive value at this historically ultra-low P/E ratio. Bears like TugMcGraw growl back with complaints about the company's financial services and "over $4 in debt for every dollar of shareholder equity."

What management does:
Sales growth accelerated, even as margins shrank over the past few quarters. The net result is hesitant earnings growth. The bright spot here is the way free cash flows put net income to shame.

Margins

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Gross

40.5%

40.7%

40.4%

39.9%

39%

38%

Operating

17%

17.2%

16.8%

16.6%

15.8%

15.1%

Net

13.5%

13.3%

13.3%

12.9%

12.5%

12%

FCF/Revenue

8%

11.8%

12.1%

16.3%

17.6%

15.9%

Y-O-Y Growth

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Revenue

5.1%

8.2%

9.9%

14%

13.4%

12.3%

Earnings

7.4%

10.1%

11.9%

15.9%

7.9%

2%

All data courtesy of Capital IQ, a division of Standard & Poor's.
Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
OK, so GE does lean heavily on the financial services market. At 4-to-1, its leverage may not be much for a large bank, but in this environment, that stat sticks out like a sore thumb. This is still a conservative business, though. According to the company's latest 10-K, subprime mortgage contracts account for only $1.6 billion of GE's $45 billion in investment securities.

And again, if an acknowledged financial genius and risk-hater like Buffett feels compelled to invest several billion dollars in GE today, you have to think that the company stands on solid financial footing. GE has survived two World Wars and a few smaller ones, the financial meltdowns in 1929 and 1987, and countless other mishaps.

Through it all, and including a 50% price drop in the last year alone, the stock has produced market-smashing 16.3% annual returns over the last four decades. GE trades at eleven-year lows right now. Let's just say that any bad news you could think of has already been priced in. This is a fantastic time to be a value investor.

3M and Berkshire Hathaway are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


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