U.S. stocks are higher on Friday, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) up 1.31%, and 1.38%, respectively, at 12 p.m. EDT. Shares of one the S&P 500's biggest weightings, General Electric, are outperforming, up 4.04%.
Can one of America's oldest blue-chip companies, which is covered by 21 Wall Street analysts and has a market value of nearly $270 billion, be significantly mispriced by the market? That's the $2.5 billion bet that activist investor Nelson Peltz and his company, Trian Partners, revealed this morning, on industrial stalwart General Electric.
Although that figure is less than 1% of General Electric's market value, it's over a fifth of Trian's assets under management, by my estimate (and enough to make Trian a top 10 shareholder).
Trian's chief investment officer, Ed Garden, described GE as "an amazing risk/reward" this morning, and you need to believe that in order to make a bet that size. Trian thinks the shares could represent $40 to $45 in total value by the end of 2017.
Their investment thesis, which they lay out in extensive detail in an 81-page presentation, rests on several observations:
- General Electric is a world-class industrial company that is a leader in markets with significant barriers to entry, and it has an extremely stable cash flow profile.
- The company is continuing its transformation to minimize the weight of GE Capital and is focused on improving profitability and capital allocation.
- However, revulsed by GE's mediocre operating results and shareholder returns over the past decade, investors are currently unable or unwilling to recognize the potential of this transformation.
- As a result, instead of commanding a premium to the market, GE shares are valued at less than 14 times this year's (pro forma) earnings.
That combination -- assuming it's verified -- spells opportunity, and I must admit Trian's presentation is compelling. I'm certainly willing to believe that, following a decade of disappointing results, the market has, to some extent, written GE off.
My biggest skepticism, however, relates to management: Why has it taken Mr. Immelt so long to effect GE's transformation? He's been at the helm for nearly a decade and a half, and the financial crisis peaked more than six years ago.
Trian appears to have no such concerns, saying they are broadly supportive of management and its plan, and they have not asked for board representation.
The possibility that a company as visible as General Electric could be significantly mispriced sounds unlikely, but there is a recent precedent.
In August 2013, Carl Icahn announced that he had taken a "large position" in Apple, which he added to through the first quarter of 2014. Through Sept. 30, I estimate he has made a profit of $2.1 billion on a cost basis of $3.7 billion. That's the sort of payday Mr. Peltz is looking for with his bet on GE.