The financial crisis rattled General Electric in 2009, leading critics to say the company had lost its way. A common refrain emerged that GE was worth less than the sum of its parts. In other words, shareholders would be better off if the conglomerate was sliced up and sold at auction.
GE's management team saw it differently: the company needed to be pruned, not chopped into pieces. This "renewal" was described in its 2009 letter to shareholders:
For the last decade, we have run the Company with, at times, more than half our earnings coming from financial services. As we grew, financial services became too big. ... GE must be an industrial company first. ... We have taken strong actions to simplify and focus GE around our core competitive advantages.
The shareholder letter also described GE's intent to "spread innovations across the portfolio" and reshape itself into a true industrial conglomerate. The idea of simplification has become a core value at GE as the industrial businesses take center stage while its banking segment, GE Capital, prepares to spinoff a portion of its North American retail finance operation.
Even with this simplification effort, however, investors often find it difficult to assess and value GE's underlying businesses. I recently provided an in-depth overview of all eight segments, but a holistic approach would evaluate how each of these businesses fits together to provide an overall competitive advantage. That's no easy undertaking.
One way to look at GE's performance, however, is to compare the industrial giant to its peers, notably other industrial conglomerates. With this goal in mind, I selected four companies to stack up against General Electric: 3M, Siemens, Honeywell, and United Technologies. The chart below reveals their relative performance with GE lagging behind in total returns over the past 1-year period:
In many ways, these companies are quite similar to GE. Their operations span a variety of industries. They tend to expand the top line through a mix of organic growth and acquisitions, the latter made possible by their size and available cash. Furthermore, their revenue base is global, not reliant on one particular country or region.
Of course, there are some differences, including the lack of a substantial banking arm at the companies not named GE. Despite GE's recent efforts to downsize, GE Capital still delivers a not so trivial 34% of the company's earnings in 2013. In contrast, Siemens's financial services business provided only 7% of earnings in 2013.
Nonetheless, for those looking at the industrial sector and wondering whether GE looks like a buy relative to its peers, the following breakdown by the numbers is a good place to start your analysis:
Keep in mind, the charts above present a quantitative analysis of the companies, and, as my colleague Morgan Housel has pointed out, investing is more art than science. So be sure to take the data with a grain of salt.
On the whole, however, I find Siemens to be the one outlier I would avoid at this point, with the rest of the companies sitting in positions of strength. That's simply because Europe's flagging economy has left German companies stuck in neutral in recent years.
GE, meanwhile, measures up quite nicely, with a forward P/E that is lower than all of its American counterparts and earnings growth squarely in the middle of the pack. With its own CEO betting his bonus on the company recently, now looks like a good time to hop on board "the General."