Why Investors Remain So Focused on GE Over Other Conglomerates in 2016

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There may also be a merger premium that drove UTC and Honeywell into talks. Honeywell’s offer, which was unusual for the smaller company to pursue the larger, was deemed inadequate. Still, that means that weakness in any one of the two might lead the other to revisit a merger at some point — and there potentially could be a less strict merger climate after the presidential election in 2016.

GE investors have had a lot to cheer. The company has fully recovered from the post-recession woes and it is no longer considered a conglomerate dominated by a bank. It has closed the Alstom and GE appliance deals, it has many recently closed financial deals, as well as pending deals. Its unlocking of Synchrony Financial has been completed, and GE no longer has its media exposure.

All the conglomerates might seem to have high valuations now against blended earnings expectations for 2016 and 2017, until you compare it to the broader market. Those forward blended price-to-earnings (P/E) ratios currently are as follows: GE 18.5, 3M 19.8, UTC 14.8 and Honeywell 16.5. From a relative valuation perspective, the S&P 500 is now trading at 17.7 times its forward 12-month P/E ratio, a premium of more than one point to its 15-year average.

Additional closing data and share price performance versus analyst expectations for 3M, UTC and Honeywell are shown below. The performance expected ahead for a consensus one-year price target does not take the dividend yields into consideration.

GE shares were recently trading at $30.08. The stock has a consensus analyst price target of $32.79, which implies upside of 9% from the current price level. GE has a 52-week trading range of $19.37 to $32.05, and shares are down 6.5% from the high.

Shares of 3M last traded at $169.97, with a consensus price target of $171.60, implying upside of 9.6%. The stock has a 52-week range of $134.00 to $171.27, but shares are 7.6% below the high.

UTC was trading at $100.31, within a 52-week range of $83.39 to $119.12. Shares are down 18.7% from the high. The consensus price target is $111.67 and implies an upside of 11.3%.

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Honeywell shares last traded at $114.73. The consensus price target is $124.84, implying upside of 8.8% from the current price level. The 52-week range is $87.00 to $116.56, and shares are only down 1.6% from the high.

As far as a relative valuation, GE’s market cap is over $276 billion. Berkshire Hathaway’s market cap is $356 billion, but its split structure makes it more confusing for investors – ditto for its $216,185 A-shares price.

3M has a market cap of $103 billion. UTC’s market cap is $84 billion, and Honeywell has a market cap of $87 billion. That means that the three companies have a combined market cap of $274 billion, almost identical to that of GE alone.

There are many moving parts here, and these numbers can change handily through time. Right now, the conglomerate interest still seems to focus handily around GE and its ongoing changes. If those 2018 targets become too back-end loaded, or if the market as a whole starts to feel the target is unattainable, there could be a big changing of the guard.