Is GE a Buy?

General Electric's (NYSE: GE  ) stock has had a great run recently -- it's up 24% year to date, and up 187% from its market's crisis low on March 5 last year. Is it still worth buying?

Let's take a look at how GE stacks up against some of its peers, globally:

Company

Price/Earnings
(2011 est. EPS)

Long-Term EPS
Growth Estimate

3M (NYSE: MMM  )

14.9

11.3%

Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  )

20.9

5.0%

General Electric

15.2

9.7%

Philips Electronics (NYSE: PHG  )

16.9

29.1%

Loews (NYSE: L  )

9.4

--

Siemens (NYSE: SI  )

12.7

17.6%

Source: Capital IQ, a division of Standard & Poor's.

A world-class company selling at average multiples?
The data I looked at (part of which is included in the above table) show that GE is squarely in the middle of its peer group along a wide array of valuation metrics: price-to-earnings based on estimated earnings per share for 2010, 2011, and 2012, price-to-tangible book value and dividend yield. A world-class company priced at average valuations? Surely that's a "buy" signal. Hold on: The companies in GE's peer group are hardly run-of-the-mill: Many of them are also superlative businesses (or sets of businesses, since we're talking about conglomerates).

Furthermore, General Electric is much more highly leveraged than its peers with a debt-to-equity ratio of nearly 435%. The next-highest ratio -- just 68% -- belongs to Siemens. The disparity in leverage is a product of GE's massive financing unit, GE Capital. While GE is reducing its dependency on this activity, it remains a significant source of profits ... and financial risk.

Buy 3M, sell GE
Boasting similar multiples, higher estimated earnings-per-share growth, and lower financial risk, I prefer 3M to GE. If you prefer GE, you should be able to explain why it deserves a higher multiple than 3M or why analysts are underestimating GE's future earnings growth. Based on this initial comparison, I expect 3M shares to outperform GE's over the next three to five years, but the higher conviction bet is that 3M will outperform the broad market. Consistent with the "high-quality stocks" theme, I think this Minnesota conglomerate is worth looking at now.

Between high valuations and slow growth, investors should expect disappointing returns from U.S. stocks over the next several years. Tim Hanson explains how to make more in 2010.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Berkshire Hathaway and 3M are Motley Fool Inside Value choices. Berkshire Hathaway is a Motley Fool Stock Advisor selection and the Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2010, at 5:16 PM, ozzie wrote:

    1) What Ratios may not fully reveal is the significant headwind caused by Consumer & Commercial Real Estate Defaults. These will take much of 2010 to work through. If/When things get "back to normal", GE should be able to target $2/share earnings, maybe even bay 2012 or 2013 if things go better than planned.

    2) I'm honestly not that familiar with 3M, but when I think about the future, I think about Energy Needs (including Alternative & Renewable Energies) and I think about Health Care. These are two areas you just can't discuss without mentioning GE. The big "drag" on GE would be their "Old Media" arm, which they are in the process of divesting.

    I'll keep my GE, thank you very much!

  • Report this Comment On April 07, 2010, at 6:27 PM, TMFAleph1 wrote:

    osborta,

    Thanks for your comment.

    There is nothing wrong with holding your GE shares if you are comfortable with the investment. My initial analysis suggests that 3M shares are more attractive relative to GE's shares but that doesn't imply the latter aren't attractive on an absolute basis.

    Best,

    Alex Dumortier

  • Report this Comment On April 07, 2010, at 8:19 PM, daveandrae wrote:

    I am a GE shareholder.

    Would I buy the stock at these price levels? No. Then again, I have no intention of selling my shares, either. My buy ceiling for most stocks is 1.5 times book, which as of 12/31/2009 stood at 11.06 per share for GE.

    11.06 x's 1.5 = 16.60

    Thus, at current market prices, the stock is not grossly overpriced, just out of my personal buying range.

    Thomas Edmonds

  • Report this Comment On April 08, 2010, at 10:03 AM, georgeg100 wrote:

    3-5 years should bring lots of fruit from GE's current investements in renewable energy, hybrid automobiles and its huge Health Care works. Both are good investments, but GE is till undervalued. So I will continue build up my GE holdings.

  • Report this Comment On April 15, 2010, at 2:44 PM, masterN17 wrote:

    Neither company is a buy at present levels, although both were great value buys last year around this time!

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