January 28th, 2010Clermont Ferrand, Paul Scherrer Institut DRS Chip Developments Stefan Ritt.
General Electric (NYSE:GE) Presented by Adam Ritt ... · Jeff Immelt named successor — took over...
Transcript of General Electric (NYSE:GE) Presented by Adam Ritt ... · Jeff Immelt named successor — took over...
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General Electric (NYSE:GE)Presented by Adam Ritt, BetterInvesting Director of Communications
BetterInvesting Online Stock Study Series3/2/2011 1
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Date Presented: March 2, 2011
General Electric (NYSE: GE)General Electric (NYSE: GE)
Presented by:
Adam Ritt [email protected] of Communications, BetterInvesting
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DisclaimerDisclaimer
The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting National Association of Investors Corporation (“BI”) or its volunteer advisory board (“BIVAB”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting or BIVAB. Investors should conduct their own review and analysis of any company of interest before making an investment decision.
Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the CEO of BetterInvesting or the Director of Chapter Development. This presentation is being recorded.
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What’s a “General Electric”?What’s a “General Electric”?
“Diversified infrastructure, finance and media company taking on the world's toughest challenges. From aircraft engines and power generation to financial services, medical imaging, and television programming, GE operates in more than 100 countries and employs about 300,000 people worldwide.”
Beginnings go back to 1878, when Thomas Edison established the Edison Electric Light Company.
Businesses
Energy
Energy ServicesOil & GasPower & Water
Technology Infrastructure
AviationHealth CareTransportation
GE Capital
Aviation Financial ServicesConsumer Finance Energy Financial ServicesReal Estate
Home & Business Solutions
Appliances & LightingIntelligent Platforms
NBC Universal
Cable, Film, etc.
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A Mutual Fund for the General EconomyA Mutual Fund for the General Economy
GE enters and exits businesses frequently: portfolio constantly evolving
� In 1986 reacquired RCA, which included NBC. Shed other businesses. Announced in 2009 a sale of 51 percent of NBC Universal to Comcast.
� GE Healthcare acquires medical software firm IDX Systems in 2006 for $1.2 billion.
� GE Advanced Materials sold to Apollo Management for $3.8 billion.
The BetterInvesting philosophy: Management, management, management
� General Electric known for great managemento "The bench is widely viewed as one of the deepest in the world.” — Brooks C. Holtom, Georgetown
University’s McDonough School of Business (BusinessWeek, April 15, 2010)
� Adopted Six Sigma in 1995: “The central idea behind Six Sigma is that if you can measure how many ‘defects’ you have in a process, you can systematically figure out how to eliminate them and get as close to ‘zero defects’ as possible.”
� GE delivered excellent growth under Jack Welch (1981-2001)
� Jeff Immelt named successor — took over Sept. 7, 2001
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General Electric (NYSE:GE)Presented by Adam Ritt, BetterInvesting Director of Communications
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GE Divisions: RevenuesGE Divisions: Revenues
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USD in millions, unless otherwise stated
Division 2008 2009 2010
GE Capital 68,577 49,746 47,040
Technology Infrastructure 41,605 38,517 37,860
Aviation 19,239 18,728 17,619
Healthcare 17,392 16,015 16,897Transportation 5,016 3,827 3,370
Energy Infrastructure 43,046 40,648 37,514
Energy 31,225 33,698 30,854
Oil & Gas 7,417 7,743 7,561
NBC Universal 16,969 15,436 16,901Home & Business Solutions 10,113 8,443 8,648
Corporate 2,201 2,488 2,248
Consolidated Revenues 182,511 155,278 150,211
Rank of Divisions by Revenue
1.GE Capital2.Technology Infrastructure3.Energy Infrastructure
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GE: Operating ProfitGE: Operating Profit
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USD in millions, unless otherwise stated
Division 2008 2009 2010
Energy Infrastructure 6,497 7,105 7,271
Energy 5,515 6,045 6,235
Oil & Gas 1,127 1,222 1,205
Technology Infrastructure 7,460 6,785 6,314Aviation 3,684 3,923 3,304
Healthcare 2,851 2,420 2,741
Transportation 962 473 315
GE Capital 8,014 1,462 3,265
NBC Universal 3,131 2,264 2,261Home & Business Solutions 368 370 457
Corporate (1,910) (2,826) (3,321)
Total 23,560 15,160 16,247
Rank of Divisions by Operating Profit
1.Energy Infrastructure2.Technology Infrastructure3.GE Capital
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GE: Operating Margin PercentageGE: Operating Margin Percentage
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Division 2008 2009 2010
Energy Infrastructure 15.1% 17.5% 19.4%
Energy 17.7 17.9 20.2Oil & Gas 15.2 15.8 15.9
Technology Infrastructure 17.9 17.6 16.7
Aviation 19.1 20.9 18.8
Healthcare 16.4 15.1 16.2
Transportation 19.2 12.4 9.3NBC Universal 18.5 14.7 13.4
GE Capital 11.7 2.9 6.9
Home & Business Solutions 3.6 4.4 5.3
Total 12.9 9.8 10.8
Rank of Divisions by Operating Margin
1.Energy Infrastructure2.Technology Infrastructure3. NBC Universal
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GE: End MarketsGE: End Markets
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General Electric (NYSE:GE)Presented by Adam Ritt, BetterInvesting Director of Communications
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Recent HistoryRecent History
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Growth slows down
� Past 10 years EPS growth: 6%. 1993-2002: 12% (Value Line)
As GE Capital goes, so goes GE
� Problems took focus away from industrial side of business
� Caused stock to plunge to about $7
� GE’s goal: reduce importance of GE Capital
� Buffett to the rescue� Berkshire Hathaway: $3 billion investment in 2008� Preferred shares with 10% dividend� GE plans to call in shares
GE (blue) vs. S&P 500 (red), 1991-2011
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Recent NewsRecent News
Up 18% for YTD through Feb. 16
� Jumped 7% on Jan. 21 after reporting 4Q earnings
� Beat analysts’ expectations
� GE Capital improving
� Major increase in locomotive sales
� 12% increase in electric turbines and jet engines
"The most exciting thing is the return to organic revenue growth.” — Jack De Gan, Chief Investment Officer, Harbor Advisory Corp. (Portsmouth, N.H.)
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On to the Stock Selection GuideOn to the Stock Selection Guide
Online Stock Selection Guide
� Housed on the BetterInvesting member site
� Allows you to determine:
o Company’s quality
o Whether the stock is selling at the right price
� Study history
o Sales, earnings, management performance
� Determine whether we want to continue study
� Determine whether stock is selling at right price
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1. “Basic” mode2. Preliminary data
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Revenue EstimatesRevenue Estimates
Sources
� Historical data
� Recent history?
� Value Line: 3% (Annual Rates box), 7.5% (2010 to 2013-2015 forecast)
� Morningstar: 5% long-term organic growth
� Analysts’ consensus estimates: $142.3B in 2011 (down 5.3%), $147.9B in 2012 (up 4.0%)
� Citibank: down 9.6% in 2011, up 4.2% in 2012, up 5.4% in 2013
� Credit Suisse: down 7.7% in 2011, up 6.2% in 2012, up 6.0% in 2013
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Sanity Check: FiveSanity Check: Five--Year ModelYear Model
Is five-year growth of 5% growth achievable?
� Use analysts’ estimates of next two to three years
� Project final two to three years
� Is this a realistic scenario?
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Five-Year Model2010 Ann. Growth$150.2B (GE figure)
2011 (ACE)$142.3B (5.3%)
2012 (ACE)$147.9B 4.0%
2013 (Citi/Credit Suisse)$156.4B 5.7%
2014$172.0B 10.0%
2015$191.8B 11.5%
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Poll QuestionPoll Question
3.0% (Value Line Annual Rates box, GE’s 10-year rate)
5% (Morningstar long-term organic rate/GE rate 2000-08)
7.5% (Value Line 3-5 year forecast)
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What is the estimated future sales growth?What is the estimated future sales growth?
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Poll ResultsPoll Results
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EPS EstimatesEPS Estimates
Sources
� Historical rates
� Recent history
� Value Line: 7.5% (Annual Rates box), 23.5% (2010 to 2013-2015 forecast)
� Analysts’ consensus estimate (long term): 13.9%
� ACE: $1.32 in 2011 (up 14.8%), $1.62 in 2012 (up 22.7%)
� S&P 3-year growth: 14%
� Argus 5-year growth: 11%
� Credit Suisse 3-year growth 19.7%; Citibank 3-year growth 15.8%
ConclusionThe Analysts Must Be Crazy?
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Earnings Growth Higher Than Sales Growth Earnings Growth Higher Than Sales Growth
Over the long run, gravity eventually takes hold
� EPS won’t outpace sales forever
� Conservative investors don’t estimate higher EPS growth than sales growth
We’re looking out over five years, not forever
� If you believe EPS growth can exceed sales growth, understand why.o Fewer common shares outstanding; the company is buying back shares
o Profit margins are increasing
o “Return to profitability in the transportation segment” — Morningstar
o Energy infrastructure will be “backbone for the firm’s growth” — Morningstar
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Earnings Growth: Outpacing Sales?Earnings Growth: Outpacing Sales?
Common Shares Outstanding
� GE extended repurchase program through 2013
o $11.6 billion remaining
� Value Line projects modest decrease in shares outstanding: 10.675B in 2010 to 10.325B in 2013-15
Profit Margins
� Analysts across the board expect much higher profit margins
o Value Line: 8% net profit margin in 2010 to 13.4% in 2013-15
o Citibank: 18.9% growth in pre-tax profits for next 3 years
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Poll QuestionPoll Question
Same as Sales Growth Rate
5.5% (Rate for 2000-2008)
7.5% (Value Line Annual Rates Box projection)
14% (analysts’ consensus estimate)
12% (ACE minus 2 percentage points)
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What is the estimated future earnings growth?What is the estimated future earnings growth?
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Poll ResultsPoll Results
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P/E RatiosP/E Ratios
High P/E ratio has held up remarkably well
� Low of 17 in 2009, high of 24.3 in 2005
� Highs of 2000 (47.8) and 2001 (38) likely won’t return
� P/Es much higher than growth because of company’s “quality”
Low P/Es cratered in 2008 and 2009
� 7.1 in 2008, 5.6 in 2009
� Became valued as a “financial company”
� Financial companies often have lower P/Es because there’s less clarity on earnings
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Poll QuestionPoll Question
18.9 (5-year average)
17.1 (average in 2009/2010)
1.5 times the future growth rate of earnings (PEG = 1.5)
2.0 times the future growth rate of earnings (PEG = 2.0)
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What is the estimated average high P/E ratio?What is the estimated average high P/E ratio?
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Poll ResultsPoll Results
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Poll QuestionPoll Question
$5.73 (Recent market low price)
$12.90 (5-year average low P/E x low EPS)
$13.75 (52-week low)
$14.57 (70% of current price)
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What is the estimated low price?What is the estimated low price?
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Poll ResultsPoll Results
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ReminderReminder
The prices and data were locked in on (enter date)
The judgments used in this study were a team effort
Always do your own study and make your own judgments before making any investment decisions
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Questions?Questions?
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Upcoming Stock Study:Upcoming Stock Study:
Abbott Laboratories (NYSE: ABT)Abbott Laboratories (NYSE: ABT)
Carol TheineCarol Theine
Puget Sound Chapter PresidentPuget Sound Chapter President
Wednesday, April 6, 2011Wednesday, April 6, 2011
9:00 PM Eastern Time9:00 PM Eastern Time
Thank You!Thank You!