General Electric Co. (NYSE: GE) is still the largest of the core conglomerates, outside of Berkshire Hathaway. In fact, it is more or less the same size by market cap as 3M, Honeywell and United Tech combined. Now that shares have run so much higher, and now that the valuations have started to play out in a post-financial GE, some analysts are beginning to hint that perhaps GE is fairly valued — maybe even overvalued.
While this may sound like a bash of GE, it is not. The consensus analyst price target for the stock still implies almost 10% upside from Monday’s closing price — or over 12% if you include GE’s 3% dividend yield. On top of that, there is the notion that GE will be buying back billions and billions worth of its stock.
The impetus for this review of a more cautionary view is because Cowen’s initiated coverage of General Electric with a mere Market Perform rating on Tuesday. That sounds harmless enough, until you look at the $29 price target, which is more than a dollar lower than the $30.12 close of Monday.
Then we have to consider that JPMorgan has issued a much more serious analyst call on GE, with an Underperform rating and a downside price target of $27.
24/7 Wall St. took some additional analyst notes from recent calls as well to see what the real views for GE look like, without the bias of the flurry of analyst calls right around earnings.
Cowen’s Guatam Khanna voiced some concerns over GE’s valuation. Despite its portfolio transformation that moves its earnings toward the industrial segment, the gains of 15% may be harder to pull off continually through 2018. Khanna said after evaluating the $1.99 earnings per share (EPS) target for 2018:
We conclude that General Electric is unlikely to meet the implied organic industrial EBIT targets, as mix pressures at Power & Aviation and cyclical pressures at Oil & Gas & Transportation mitigate gains elsewhere. The guided Alstom accretion ($0.15 to $0.20), while plausible, is a lower conviction case, as Alstom’s order book atrophied in the period while the General Electric acquisition was pending.
The current view is that GE is valued at 17.1 times consensus 2017, while 2017 and 2018 street estimates drift lower. Cowen does note that it is below consensus on its view. Cowen’s report suggested that 56% of 2015 industrial EBIT was from Power & Aviation and 21% from was from oil, gas and transportation. Another 24% comes from other verticals.
General Electric’s stock has outperformed the industrial sector and trades at a premium to industrial peers. Cowen noted that GE went from an underowned stock to one that now has to exceed estimates in order to sustain its premium valuation.