I don't like GE because of it's huge financial arm, that is generating 6.4B (~32%) of GE's pre-tax profit. There is also 440B$ in debt load for the financial arm, which owns assets that are very sensitive to the economy (real estate, leasing etc.) The whole thing goes for 12x earnings.
I recommend you do a sum of part analysis and split up GE in it's industrial ops and the GE finance. Compared to mother financial, GE Finance is not worth more than 7x earnings, imo (look at JPM, MET etc for comparison)
Ge industrial is going to make maybe 13B$ pre-tax or 10B$ post tax profits, take a 13x multiple and you have. 130B$ in EV for this business. Ge finance is going to make 5B$ post tax, with an 8x (generous multiple) I get 40B$ in value. Sum of parts is 140B$. Current market cap is 200B$ -Based on a sum of part analysis, GE looks overvalued.
Also, GE is heavy into acquisitions in the Oils and gas sector. This is a cyclical sector that typically commands lower multiples than other industrial business lines.
Why not by ABB or SI at 12x or 10x multiple, get rid of the tail risk from financial operations and a cheaper multiple. personally, I'd rather deal with a somewhat higher exposure to Europe (ABB or SI are European companies but run their business worldwide) than with the tail risk from the financial operations. |
