Now Is the Time for Conglomerates to Catch Up to Market Opportunity

September 18, 2013 by Paul Ausick

GE Logo
Source: courtesy of General Electric
When we looked at conglomerate stocks earlier this year, one company stood out. Based on implied gains and dividend payouts, General Electric Co. (NYSE: GE) struck us as a good bet. GE’s stock price is up about 9% since then, but that appreciation lags behind the other four companies in our earlier review. United Technologies Inc. (NYSE: UTX) is up about 22.5% since early February, Honeywell International Inc. (NYSE: HON) is up more than 21%, Berkshire Hathaway Inc. (NYSE: BRK-A) is up more than 18% and 3M Co. (NYSE: MMM) is up nearly 18%.

By way of comparison, for that period the Dow Jones Industrial Average (DJIA) is up about 11% and the S&P 500 is up nearly 13%. All the conglomerates, with the exception of GE, have performed better. A second look is obviously due. We have reviewed performance to date, the forward price-to-earnings ratios, the implied upside and the dividend yield of each company in evaluating the top conglomerates.

Berkshire Hathaway Inc. (NYSE: BRK-A) closed Tuesday night at $173,299, in a 52-week range of $125,950 to $173,4332, and is up 18% year-to-date. Berkshire Hathaway is too thinly followed by analysts to give consensus price target data, and the company discourages using earnings as its real metric. Team Buffett pays no dividend.

General Electric Co. (NYSE: GE) closed Tuesday at $24.45, against a 52-week range of $19.87 to $24.95, and it is up by 9% since February. GE trades at about 13.6 times the expected 2013 earnings estimate of $1.66 per share. The Thomson Reuters consensus price target of around $26.30 continues to rise and now implies that there is upside of about 7.6% still in the stock. GE leads the dividend yields of conglomerates with a 3.2% yield on its common stock. This remains the top conglomerate by market cap at about $250 billion.

Honeywell International Inc. (NYSE: HON) closed at $85.84, and it has traded in a 52-week range of $58.89 to $85.67. Honeywell trades at about 15.4 times the expected 2013 earnings estimate of $4.95 per share. The consensus price target of around $88.30 signals that there is upside of about 2.9% still in the stock for the next year. Honeywell’s dividend yield now is about 2.0%.

3M Co. (NYSE: MMM) closed Tuesday at $119.93, against a 52-week range of $86.74 to $120.44. It is up by about 18% since February. 3M trades at about 16 times the expected 2013 earnings estimate of $6.70 per share. The consensus price target near $121.50 implies that there is upside of 1.3% in the stock, and the dividend yield is 2.1%.

United Technologies Corp. (NYSE: UTX) closed at $110.39 last night, against a 52-week range of $74.44 to $111.47. United Tech trades at about 15.8 times the expected 2013 earnings estimate of $6.15 per share. The consensus price target of $116.30 implies upside potential of 5.4%, and the dividend yield is now about 2.0%.

While GE lags its peers in share price gains for the year and the stock has not kept up with either the DJIA or the S&P 500, its upside prospects are the best among the five conglomerates we looked at for the rest of the year. GE also pays the highest dividend yield among the five. The company is so big, though, that it takes a lot to move the needle. A couple of asset sales and maybe a spin-off or two would help GE unlock more shareholder value.

Could the other stocks we looked at here pop again as they have since February? Anything is possible, but all look near to being fully valued.