Valuing The Best Conglomerate For The Second Half of 2011 (GE, UTX, BRK-A, HON, MMM, TXT, TYC)

24/7 Wall St. has been using valuation analysis for value investors for a couple of weeks and we wanted to review the conglomerates in a search for the best value for long-term investors as of this summer.  The current woes in Europe and the debt ceiling debate in the U.S. are two key issues to consider, but the goal is try to get past the news and noise of today and this summer.

We evaluated General Electric Co. (NYSE: GE); United Technologies Corp. (NYSE: UTX); Berkshire Hathaway Inc. (NYSE: BRK-A); Honeywell International Inc. (NYSE: HON); and 3M Co. (NYSE: MMM).  Also included were reviews of Textron Inc. (NYSE: TXT) and Tyco International Ltd. (NYSE: TYC).

In our analysis, we considered prices, forward P/E ratios, dividend yields, and return on equity.  We also then considered the fundamentals of each and included an implied upside to the Thomson Reuters consensus price targets.  Conglomerates are in a different position that they were in 2010 and now the field is mixed.  Some stand out above and beyond peers, and some look tired in the current market.

General Electric Co. (NYSE: GE) pays a 3.2% dividend.  The company sells at a price to book ratio of about 1.6 to 1.  Its forward price earnings multiple is 11.4 and its return on equity is 11.25%.  GE’s shares recently traded at $18.63.  The 52-week price range is $13.83 to $21.33. Thomson Reuters has a consensus price target of $23.87, implying roughly 28% upside.  General Electric is also in the midst of solar investing as well as other new financings, but that is the norm for a company the size of GE.  This price-to-book value seems rather low, and we would be the first ones to admit that trying to accurately place a book value on G.E. at any given time would not be an easy feat.  With much still tied to consumer and customer financings, investors have to also understand that G.E. remains more of a bank compared to other conglomerates. It also has the highest market capitalization of all conglomerates again at $197 billion.

United Technologies Corp. (NYSE: UTX) pays a 2.13% dividend.  The company sells at a price to book ratio of 3.7 to 1.  Its forward price earnings multiple is 14.6 and its return on equity is 21.5%.  United Technologies recently traded at $90.35.  The 52-week price range is $63.53 to $91.83. Thomson Reuters has an average price target of $97.83, implying that it has almost 10% upside.  United Tech is one that we recently noted could become one of the next mega-caps with a $100 billion market capitalization, which is really not too much higher than the consensus price target objective when you consider a $82 billion market cap.  That will not happen if the economic worries morph into something worse.

Berkshire Hathaway Inc. (NYSE: BRK-A) sells at a price to book ratio of about 1.2 to 1, but it pays no dividend to its shareholders.  Its forward price earnings multiple is 15.2 and its return on equity is 7.06%.  This Warren Buffet progeny has not yet announced a dividend, though many industry observers believe it’s about time they did.  Berkshire Hathaway recently traded at $113,000.00.  The 52-week price range is $109,925.00 to $131,463.00. Without an official price target, the upside depends upon your interpretation of what sort of premium this one should trade at against book value.  The biggest trick about Berkshire Hathaway is to remember that net income on any given quarter is not the metric to use because Warren Buffett has said it could be almost whatever they wanted due to mark-to-market and due to quarterly fluctuations in all of its units.  That is fortunate considering that the company’s insurance losses cut its earnings in half at the last earnings report.  There are two words that the media has not used in a month or more and the company has to be happy about it: David Sokol.  This pending acquisition of Lubrizol has not yet closed, although it is not a huge transaction despite the $8.6 billion market cap.