Before GE Earnings: Upside in Conglomerates (BRK-A, GE, HON, MMM, UTX, SPY, DIA)

Conglomerates have enjoyed solid performance in 2010 and General Electric Co. (NYSE: GE) is set to report earnings on Friday morning.  A market concern and a sector concern so far is that many companies and many sectors have gone stray and some see a glass half-full and some half-empty. Many of the conglomerate target objectives, performance, and upside have all become more focused of late.  We reviewed Berkshire Hathaway Inc. (NYSE: BRK-A), General Electric Co. (NYSE: GE), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON), and United Technologies Corp. (NYSE: UTX) to see which conglomerates had  performed the best and which had the most implied upside according to Wall Street analysts.  For a reference, the SPDRs (NYSE: SPY) for the S&P 500 have run about 7% so far in 2010 and the DIAMONDS (NYSE: DIA) have run just over 8% so far in 2010.

Many conglomerates have done better in the general stock appreciation and total return year-to-date in 2010.  What we are finding is that earnings estimates matter little so far in earnings season, and guidance matters utmost for the navigation of the current quarter we are already in.  Too bad it is guesswork.  We have provided consensus price target objectives and color on each conglomerate in the field with comparable data on performance, expected performance, dividends, earnings color, and more.  Are currencies, commodities, access to financing, and market conditions considered as risks and a mandatory hurdle to overcome?  You bet.

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) is a conglomerate which is not always considered a conglomerate. First, there is no dividend and its control is very tight.  It has vast investments and insurance operations, yet the BNSF acquisition in rail took it far more into the status of an operating conglomerate.  Now on top of insurance and finance, there is rail, building, retail, manufacturing, private jets, and more.  There is no  more concern that Mr. Buffett and friends can be called a mutual fund.  The big change was after the BNSF deal.  Buffett’s conglomerate is now in the S&P 500 Index and Russell indexes, it has split is B-shares to a level that the public can now invest, and Buffett is still without a successor to the empire. While the market is up for the year, Berkshire Hathaway is up close to 25% so far in 2010 and that is the best performer of conglomerates.  The consensus analyst price target on the “A” shares is $136,000.00, implying that the projected upside is about 8.5%.  The last quarter earnings estimates from Thomson Reuters are almost $1650 EPS and for 2010 those estimates are close to $6600 EPS.

General Electric Co. (NYSE: GE) is on deck for earnings tomorrow, it has risen well year-to-date, and it has the most implied upside of all conglomerates at the moment before earnings.  The giant company has committed to returning to a better dividend and also to buying back shares. The company reports this Friday morning, so whatever the numbers are now will likely change for it and the whole group by next week.  GE has shrunk its finance role and it has made it through the recession and is now an acquirer again.  Getting rid of NBC-Universal is still on despite questions pending. Jeff Immelt told us in an exclusive interview that GE would look at some bolt-on inorganic growth opportunities, and it is managing its cost structure aggressively. Things are even good enough that the dividend hike will challenge 3% if any rally comes.  Common holders have had 2010 return of over 16% year to date, but the implied upside to the $20.23 consensus price target is still about 17% from the current $17.28 before earnings.  The last quarter earnings estimates from Thomson Reuters are $0.27 EPS and $37.67 billion in revenues; for 2010 as a whole those estimates are $1.11 EPS and $152.26 billion in revenue.

3M Co. (NYSE: MMM) has raised the dividend and we think that will stay a tradition with a low enough payout ratio and dividend coverage ratio that those dividend hikes could be far more.  Its current dividend yield is 2.4%.  The conglomerate which owns the Post-It notes also recently completed the acquisition of Arizant.  3M is often considered American and more domestic, but currency plays a role here too.  The stock closed out 2009 at $81.11, so 10% is about what we have seen here this year.  Shares are currently at $89.14 and have traded just above $90 over the last year.  The consensus analyst price target is $101.87, implying upside of close to 12%. The last quarter earnings estimates from Thomson Reuters are $1.51 EPS and $6.83 billion in revenues; for 2010 as a whole those estimates are $5.80 EPS and about $26.4 billion in revenue.

Honeywell International Inc. (NYSE: HON) still is classified by many as a defense firm.  It is a conglomerate with aerospace products and services, control technologies for buildings, homes and industry.  It also has automotive products, turbochargers; and specialty materials.  Honeywell was at one point a target for a GE acquisition many years ago.  At $46.41, the stock is up about 21% so far in 2010.  The consensus analyst price target is $50.16, implying upside of only about 8%.  The dividend yield is still about 2.70%. The last quarter earnings estimates from Thomson Reuters are $0.62 EPS and $8.21 billion in revenues; for 2010 as a whole those estimates are $2.52 EPS and almost $32.8 billion in revenue.

United Technologies Corp. (NYSE: UTX) had been a laggard before, but shares are up close to about 9% so far in 2010.  With layoffs still fresh, there is possibly more of a coin toss implied on many fronts.  Still, there is upside expected.  Its dividend is uninspiring compared to its peers at roughly 2.30% in dividend yield.  The consensus analyst price target is listed at $83.60, implying over 12.5% upside to the consensus target.  The last quarter earnings estimates from Thomson Reuters are $1.28 EPS and $13.93 billion in revenues; for 2010 as a whole those estimates are $4.72 EPS and $54.44 billion in revenue.

Conglomerates were king earlier in the year as one of the top performers.  The situation has now re-normalized and certain flavors of the day have regained the attraction of momentum investors.

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JON C. OGG