General Electric (GE)
Solomon's Select, by Mark Robertson, Managing Partner October 1st, 2017
"GE is loathed but it's not likely to disappear." -- Hugh McManus. We've seen this movie before as Round Table participants and attendees witnessed strong gains in Amazon, Walgreen, Southwest Airlines and Bank of America.
We have seen this movie before. When Value Line starts their company report with, “General Electric stock is back in a funk” and article after article in the main stream investment media incessantly reminds us that GE has been the worst performing stock in the Dow, or S&P 500, or … well, you get the picture.
Hugh McManus selected Bank of America (BAC) for our monthly webcast Round Table several years ago and most of us (including the audience vote) replied with “Ugh. What could he possibly be seeing?” The rate of return on Hugh’s BAC selections stands at 29.1% (annualized) — beating the market by +15.6%. Hugh selected Southwest Airlines (LUV) while we held our noses and experienced a return of 66.6%. Walgreen (WBA) was another market-trouncing selection that met little consensus among our constituents. We held a Round Table LIVE at the NAIC national convention in Chicago on 5/16/2014 , Hugh selected Amazon (AMZN) as a standing-room-only audience didn’t cast a single vote for his nomination. He doubled down a few months later. Amazon has outpaced the stock market by approximately 40% (per year) since those selections.
Why does this matter? Because while a number of investors have recently reported selling General Electric, Hugh has been accumulating shares for the Round Table with multiple selections. He’s probably not finished yet. No one knows if this will work out in any way similar to the cited selections. But in his words, “General Electric is clearly loathed right now. I don’t believe that GE is going out of business.” The potential rewards are massive. He sees the loathing as an extended opportunity to accumulate shares of General Electric.
General Electric (GE): Equity Analysis. The company has been restructured with new leadership. If a sales growth rate of 6-7%, net margins of 14-15% and a P/E ratio in the low double digits can be achieved, the potential rewards are compelling. The historical sales data prior to 2016 should be de-emphasized and expectations developed for the new company.
Growth, Profitability, Valuation
This is not your grandfather’s GE. Or your father’s GE. In fact, it’s not your GE. The company has been steadily reconfiguring itself, shedding financial divisions and spinning off low-growth and low-profitability segments of their product and service portfolio.
You have to start with the top line. Note that in the accompanying analysis, we’ve chosen to de-emphasize (ignore) and historical data array for sales from 2007-2015. Any expectations for the representative business must be built from recent results and considered forecasts. The Manifest Investing sales growth forecast for GE is 7.2%. Value Line has a 3-5 year sales growth forecast of 6.5%.
The historical profitability for the established company has been trending near 10-12% for years. The new leadership expects the retained and acquired components to generate an overall stronger net margin. We’re using 15.2% based the trend expected for the new configuration. Value Line is using 15.3%.
The median P/E for the period 2006-2017 is 15.5×. Value Line has a projected average P/E of 15.0×. We’re using approximately 12.8x for the projected average P/E. This reflects some of the gloom-and-doom consensus from the herd of analysts. We can also think of 12.8x as a low bar. If GE can meet the sales and profitability objectives, we’d expect a P/E in the high teens.
At the time of selection (10/9/2017), the stock price is $24.39, the projected annual return is 15-16%. The quality RANKING is 95 (Excellent) and the financial strength rating is 67 (B++).
Points of View
You can review Hugh’s GE commentary during the July and August Round Tables (at the 58:00 minute mark) by visiting the collection of YouTube videos at: Manifest Investing YouTube Channel
Put your imagination to work. We’ve seen this movie before.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.