The latest carnage in the market has left some companies at valuations that are getting hard to ignore, even knowing about the harder economic times. Value investors invest before recessions, through recessions, and after recessions. They are not looking for tomorrow’s price in most cases. The bearish trend of the summer, particularly that of July’s end into August, was even brutal on the diversified conglomerate sector, despite the notion that it is the conglomerate structure that is supposed to offer some shelter during hard times.

We have reviewed and identified the following conglomerates for our value review: General Electric (NYSE: GE), United Technologies (NYSE: UTX), Berkshire Hathaway (NYSE: BRK-A), Honeywell International (NYSE: HON), and 3M (NYSE: MMM). Also included were reviews of Textron (NYSE: TXT) and Tyco International (NYSE: TYC). ITT Corp. (NYSE: ITT) was not reviewed because of its ongoing restructuring ahead, although there may be a significant special situation still developing there. The top valuation winner will be shown after reviewing all of them.

We used a Finviz.com screening tool for year ahead estimates (next year), price-to-book ratios, and for the return on equity. We also reviewed the consensus price target objectives from Thomson Reuters to see what sort of implied upside remains if the analysts are still accurate. In most cases, we would have a fair value under most research targets today due to the headline shock factors that spook the markets each week now. We have taken a review of dividend yields and looked at many ongoing challenges in the sector today. September is said to be a cursed market month, and searching for value alone does not ever imply that the lowest dollar price on the stock has been seen.

Berkshire Hathaway (NYSE: BRK-A) recently traded at $102,575.00 and its market cap is roughly $175 billion. The 52-week trading range is $100,265.00 to $131,463.00. The current market value at a price-to-book ratio is about 1.08 to 1. Its forward price earnings multiple is 13.9 and its return on equity is 8.04%. Thomson Reuters has a consensus price target of $130,250.00, implying roughly 27% upside to the most recent price. The big issue with Berkshire Hathaway is that it is still too sluggish compared to most stocks. The earnings at any interval can be what Buffett and Munger decide they should be, the quarterly holdings are not completely reported, and on and on. Many still think of it as an insurance company that has many stocks and bonds and operating entities.

General Electric (NYSE: GE) recently traded at $15.60 and its market cap is roughly $168 billion. The 52-week trading range is $14.76 to $21.33. The current market value at a price-to-book ratio is about 1.3 to 1. Its forward price earnings multiple is 9.8 and its return on equity is 11.34%. The conglomerate currently pays investors a dividend yield of 3.8%. Thomson Reuters has a consensus price target of $21.96, implying roughly 40% upside to the most recent price. Some recent estimate cuts make us question this sub-10 forward P/E, but the current P/E is also under peers at about 12.25 today. Jeff Immelt has appeared to vow off high-dollar mergers in favor of bolt-on deals as he is still reportedly happier with the GE portfolio than ever. GE’s biggest lag is that many still consider it half-conglomerate half-bank.

Honeywell International (NYSE: HON) recently traded at $46.35 and its market cap is roughly $37 billion. The 52-week trading range is $40.77 to $61.48. The current market value at a price-to-book ratio is about 3.1 to 1. Its forward price earnings multiple is 10.5 and its return on equity is 23.4%. The conglomerate currently pays investors a dividend yield of 2.8%. Thomson Reuters has a consensus price target of $61.83, implying roughly 33% upside to the most recent price. Honeywell currently has a P/E ratio of about 15, so we also would use kid gloves when considering the P/E multiple for next year’s earnings. We still wonder if this should not be a DJIA component.

3M (NYSE: MMM) recently traded at $79.75 and its market cap is roughly $57 billion. The 52-week trading range is $76.50 to $97.53. The current market value at a price-to-book ratio is about 3.3 to 1. Its forward price earnings multiple is 11.8 and its return on equity is 27.32%. The conglomerate currently pays investors a dividend yield of 2.7%. Thomson Reuters has a consensus price target of $100.47, implying roughly 26% upside to the most recent price. 3M fell more than we would have expected considering how it had been holding up before the summer. The July to August selling was harsh for 3M. What is amazing for 3M is that it was challenging all-time highs this year.

Textron (NYSE: TXT) recently traded at $15.66 and its market cap is roughly $4.3 billion. This may be too small to count now and some still do not count it as a full-blown conglomerate. The 52-week trading range is $14.66 to $28.82. The current market value at a price-to-book ratio is about 1.4 to 1. Its forward price earnings multiple is 9.1 and its return on equity is 4.53%. The conglomerate currently pays investors a dividend yield of 0.5%. Thomson Reuters has a consensus price target of $29.29, implying roughly 87% upside to the most recent price. The attack on jets and helicopters probably is not helping business at all.

Tyco International (NYSE: TYC) recently traded at $40.40 and its market cap is roughly $19 billion. The 52-week trading range is $35.54 to $52.82. The current market value at a price-to-book ratio is about 1.3 to 1. Its forward price earnings multiple is 11.2 and its return on equity is 10.22%. The conglomerate currently pays investors a dividend yield of 2.5%. Thomson Reuters has a consensus price target of $51.47, implying roughly 27% upside to the most recent price. Tyco is now the de-conglomerized conglomerate and we have only included it because many still track it as a conglomerate. We have almost no expectation that the old buyout rumors have much merit, unless the Tyco stock remains under pressure for quite a bit longer.

United Technologies (NYSE: UTX) recently traded at $72.90 and its market cap is roughly $66 billion. The 52-week trading range is $66.14 to $91.23. The current market value at a price-to-book ratio is about 2.9 to 1. Its forward price earnings multiple is 11.8 and its return on equity is 22.16%. The conglomerate currently pays investors a dividend yield of 2.6%. Thomson Reuters has a consensus price target of $95.78, implying roughly 31% upside to the most recent price. United Tech was at all-time highs and the selling has been harsh since it lost more than $20 a share in under a month from July to August. Our take is that much of the ongoing restructuring is behind it, but obviously that depends upon the economy.

The sell-off did not favor conglomerates. Some lost a quarter of their value in recent trading. Still, this has left value for the conglomerate sector for those investors who are looking farther out the calendar even if the economy is slowing. We have no ambition that the earnings estimates will not come down. When you get these at 10-times or 11-times forward earnings estimates, it generally means either that analysts have not brought down their price targets enough or that there is an anomaly in the market. The situation today feels like both.

This review leaves General Electric as the top dog for value investors digging through conglomerates. GE accounts for more than 10% of the iShares Dow Jones US Industrial (NYSE: IYJ) ETF and it routinely appears in other ETFs that have dividends and/or value themes in them. We believe that the market unduly punished the company because it is often still considered a money center bank. It even has some loose liability if that FHFA suit against the banks holds up. Still, the credit metrics have improved and the company is still trying to shrink or better manage its financial credit metrics. Throw in a dividend that is now back to almost 4% due to the sell-off, throw in that it is going to very soon repay Berkshire Hathaway and Warren Buffett for that 10% preferred later this year.

Our take is that General Electric offers the most upside to the future market trends. Jeff Immelt’s tenure hit the ten-year mark this last week, a period that has been full of challenges. He was Jack Welch’s hand-chosen successor and the timing of taking over literally right before the September 11, 2001 terror attacks could not have been a more coincidental stroke of tragedy and bad luck for his tenure.  Our take is that estimates will still trickle down for at least 2011 and likely for 2012 in the weeks ahead. All that being said, GE remains our top value in conglomerates as of September 2011.

GE was recently included in our Great Dividend Portfolio and it remains one of our 10 Stocks to Own for the Next Decade.

Again, having the term “value” does not imply immediate gains. Warren Buffett was quoted back in the 1990s saying, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.” We don’t follow anyone’s “hold forever” model even if it is from Buffett, but we did name GE as a stock to own for the next decade on a total return basis. Having close to a 4% dividend will cushion many challenges as they arise in the next decade.

The market panic has made many stocks cheap, but the slowing economy makes many stocks look artificially cheap right now because the numbers have to ratchet lower. There is a saying that “cheap stocks often get cheaper.” Without any catalysts these might get cheaper yet, particularly if the curse of September is true.

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JON C. OGG

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