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Using a Value Line Report: General Electric – January 20, 2012
As the Graph on the Value Line report shows, General Electric’s (GE - Free Value Line Report on General Electric) share price fell from the $40 level in late 2007 to a low of just under $6 in early 2009. (A stock’s high and low for the year are listed above the Graph.) Earnings declined from $2.20 per share in 2007 to just $1.03 in 2009, as noted in the historical portion of the Statistical Array. And, as if adding insult to injury, the company cut its dividend from $0.31 a share per quarter to just $0.10 in the third quarter of 2009, as shown in the Quarterly Dividend box.
Poor performance during a very deep recession was one thing, but the dividend cut was the change that truly destroyed trust for long-term shareholders. Indeed, the company had been coasting on the legacy of former CEO Jack Welch for quite some time—the last recession showed that GE was no longer the same company. It has been working diligently ever since to gain back what it has lost, however, and the shares have been trading roughly between $15 and $20 for over two years.
As the Quarterly Dividend box shows, the company has resumed dividend increases, with the first quarter of 2012 representing the fourth boost in less than two years. Although the current run rate of $0.68 a share per year is a far cry from the $1.24 that was paid in calendar 2008, at least this metric, of vital importance to many investors, is moving in the right direction.
Business, meanwhile, has been generally improving and the company has put forth a vision for the future, which includes focusing on several core initiatives, such as green technology. Indeed, although sales have yet to recover to pre-recession highs, individual business units appear to be doing relatively well, overall.
Still, the sting of the past is hard for investors to ignore. Moreover, the finance arm is still a major determinant of the company’s overall success. A slowly improving economy has led to improved performance at this division, but the lingering fear is that any new troubles here could sink results, again. That fear isn’t unfounded, particularly in light of the weak pace of the current recovery.
Yet, the past is, indeed, the past. Is the share price runup over the last six months or so an indication that General Electric is ready to break out to the upside? Although such a move is impossible to predict, Value Line’s proprietary Technical rank suggests a continuation of the positive momentum.
The Value Line Technical rank uses a proprietary formula to predict short-term (three- to six-month) future price returns relative to the Value Line universe. It is the result of an analysis, which relates price trends of different durations for a stock during the past year to the relative price changes of the same stock over the succeeding three to six months. As with the other ranks, the Technical rank goes from 1 (Highest) to 5 (Lowest). GE’s Technical rank was raised to a 2 on January 13, 2012. (This information is found in the Ranks box.) That said, the Technical rank is best used as a secondary investment criterion.
Beyond the recent price jump, there are some things to like about General Electric stock. Despite the advance, at recent prices, the stock hasn’t been this “cheap” relative to the broader market in over 15 years, save for a short period during the depths of the recent recession. Indeed, the Relative P/E of 0.86, which can be found in the Top Label, is in line with the Average Annual P/E in 2009 (found in the Statistical Array), the low point for the company’s stock price.
So, on some levels, the shares remain relatively inexpensive. Looking toward the future, Value Line’s projections call for annual earnings advances of about 12.5% per year out three to five years. (This figure can be found in the Annual Rates box.) His projections also include an increase in the Relative P/E to 1.00, which would still be on the low side historically for this company. (The projected Relative P/E can be found, in bold, to the right of the row heading in the Statistical Array.)
The projected earnings growth leads to 2014-2016 earnings per share of about $2.70. Pairing this with the projected P/E and the Safety rank of 3 (Average; found in the Ranks box) results in a projected price range of $30 to $50 per share. Taking into account dividends, which Value Line expects the company to continue to increase, and there is the potential for 15% to 30% annualized returns over the three- to five-year period.
For a diversified giant like General Electric, those are significant performance numbers. So, Value Line’s Technical ranks suggest continued strong price performance, while Value Line envisions positive longer-term operating results. Although investor sentiment can be fickle, current levels appear to offer a good entry point into GE shares for more adventuresome investors with a value bent.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.