Getting GE Stock Back to $30, Versus 3M, UTC and Berkshire Hathaway

General Electric Co. (NYSE: GE) remains a conglomerate challenged by market pundits almost daily. The reference to the stock’s fall from grace cannot be ignored, even if many of the issues of the past do not line up with today’s situation as directly as market pundits might think. What we have noticed is that GE shares have been putting in new highs, and each series of pullbacks only seems to be met with bargain buyers. That signals a stock that wants to keep rising, and the next major hurdle and target for the stock would be up around $30.

Many investors likely have a hard time thinking that GE’s $26.50 share price can rise handily to $30 or so in 2014, and then higher yet again thereafter. Before anyone gets too excited, all investors need to understand that GE is diversified into so many sectors that it is truly representative of the economy. Its growth is highly dependent on the global economy and a strong U.S. economy. This has a direct line of sight with 3M Co. (NYSE: MMM), United Technologies Corp. (NYSE: UTX) and even Berkshire Hathaway Inc. (NYSE: BRK-A).

GE wants to be valued more and more like an industrial giant rather than as a financial and industrial conglomerate. Moving Keith Sherin into the role of head of GE Capital was a smart move. The conglomerate wants to pare down the exposure to the consumer finance unit, while maintaining a strong corporate finance unit. Unfortunately, GE is constantly criticized by writers because this aim to shrink the finance unit means that revenue growth is nonexistent. In fact, sales in 2010, 2011 and 2012 were basically flat, and GE is not expected to be back at almost 4% sales growth to more than $150 billion until 2014.

GE faces the same issues that rival conglomerates and industrial giants are dealing with as well, and that is a slower developing and emerging market trend unilaterally at the moment. That is a known risk, and it is still impressive that GE showed a record backlog with its earnings report in October. That backlog was at $229 billion on last look, or about 1.5 years’ worth of entire sales.

As GE scales down its consumer finance exposure, it will have less and less of a consumer banking valuation. GE trades at 14.7 times expected earnings for 2014, and its dividend yield is 2.9% now that shares have appreciated. GE’s market cap is also $269 billion again, and earnings per share growth is expected to be about 11% in 2014, after only about 7% expected growth in 2013. Here is how that stacks up against those peers:

3M Co. (NYSE: MMM) trades at just over 17 times anticipated 2014 earnings. Its yield is only 2% for the common stock, and its market cap is $85 billion. 3M is expected to have earnings growth of only 6% in 2013 and 10% in 2014. 3M’s performance has been strong enough that at $126.50 its consensus analyst price target is almost $127, so analysts will have to lower expectations or to raise their targets to keep up.

United Technologies Corp. (NYSE: UTX) trades at almost 16 times expected 2014 earnings. UTC also trades with a 2.2% dividend yield, and its market cap is just under $100 billion now. UTC is the earnings growth leader, with nearly 15% earnings per share growth in 2013, followed by 11% expected earnings per share growth in 2014. UTC’s consensus analyst price target is almost $10 higher than the current share price, for about 9% implied upside.

Another consideration is that Berkshire Hathaway Inc. (NYSE: BRK-A) may have seen its best growth. Investors may start to decide to roll out of Berkshire Hathaway now that its share price appreciation has greatly outpaced its book value growth. Warren Buffett tells investors to ignore earnings on any given quarter but to pay attention to book value. That being the case, value investors cannot logically keep chasing Buffett’s stock as its growth is vastly higher than the growth of how Buffett himself tells you how to evaluate his performance. By the way, it has been reported that GE will be a larger holding for Berkshire Hathaway in the upcoming full list of holdings, but we will wait to see if the stock was really held after conversion in another week or so.

GE has key infrastructure growth and airplane growth ahead, even if the Power & Water segment sales have declined. If growth resumes there, then this should help with industrial valuations. The consensus price target of $27.27 implies only about 3% more upside. What will help rekindle interest from investors is that GE likely will raise its dividend yield yet again in December. Its share buyback and whatever formal plan comes out for GE Capital’s consumer finance arm will be additional drivers.

GE’s top analyst price target is $29.00, but we think that will be lifted once the dividend hike is announced and we see what GE’s stock buyback plans are for 2014.

Getting GE shares back to $30 will require the bull market to remain in place. It also will not be easy. However, expecting that GE could see a small multiple expansion on its earnings is not out of the realm of possibilities, and it is what a GE spokesperson told us was part of the goal in late 2012. Jeff Immelt and his team will have to monitor costs and keep redeploying capital back to its shareholders, and they even may have to be more aggressive in looking for acquisition opportunities again.

Stay tuned.

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