FISHER
COLLEGE OF BUSINESS
THE OHIO STATE UNIVERSITY
Fisher College of Business
Final Assignment: GE Stock Report
MBA 824
Advanced Investment Analysis
The Stock Market
Professor West
March 07, 2006
Prepared by
Ping-Lang Chu
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General Electric
Analyst: Ping-Lang Chu
Recommendation: HOLD
12-Month Target Price: $37.83
(as of March 06, 2006)
GE has an approximate 3.00% weighting in the S&P 500
Sector: Industrials
Sub-Industry: Industrial Conglomerates
Peer Group: Conglomerates - Domestic
Advisor: Royce West
EPS
Estimate
Stock Report
March 6, 2006
Symbol: GE
Summary: This industrial and media behemoth is also one of
the world’s largest providers of financing.
Price as of 3/6/06: $33.06
2006
2007
2008
1.93
2.16
2.35
52-Week Range: $37.34 - $32.21
Gross
Margin (%)
ROE
Debt on
Equity
Source: S&P GE Stock Report
Opportunities
¾ Significant growth opportunities in emerging
markets (i.e. China, India, Eastern Europe)
Increasing contributions from new growth
platforms (e.g., Water, Security, Oil and Gas)
and recent acquisitions (e.g., Vivendi Universal,
Amersham, IDX)
Investment Risks
¾ The concern of inflation may keep the
expectation of the interest rate higher and higher,
which in turn will hinder the growth of the
company. Historically, the Company has
underperformed during the period of rising
interest rate.
¾
Strong cash flow from operations (up 20% in
2006)
¾
¾
Healthy order growth rates and backlogs
¾
Reduced investment in Insurance (Genworth
equity offering, pending sale of reinsurance to
Swiss Reinsurance)
The rising energy price might slow down the
growth of the economic as well as government
spending, both domestically and internationally,
which in turn will negatively impact the growth of
the company. Historically, the Company’s stock
price has strong correlations with both GDP
growth and government spending.
¾
¾
Relatively stable asset quality in the financial
businesses
Other risks to my recommendation and target
price include any unexpected, structural
deterioration of GE's primary industrial, financing
or media end-markets.
¾
$1.0 billion in synergy benefits over the next two
years via the reorganization from 11 business
units into six ($0.09 per share)
¾
Additional risks include any sudden, rapid
structural deterioration of market positions,
competitive positions and/or business economics
of GE's main industrial, financing and media
businesses.
¾
Share repurchase activity benefiting 2005 and
2006 EPS by approximately $0.03
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Table of Contents
TABLE OF CONTENTS ............................................................................................................................. 2
TABLE OF CONTENTS ............................................................................................................................. 3
COMPANY OVERVIEW ............................................................................................................................. 4
GE COMMERCIAL FINANCE ....................................................................................................................... 4
GE CONSUMER FINANCE .......................................................................................................................... 4
GE HEALTHCARE....................................................................................................................................... 4
GE INDUSTRIAL ......................................................................................................................................... 5
GE INFRASTRUCTURE ............................................................................................................................... 5
NBC UNIVERSAL ....................................................................................................................................... 6
FIRM SPECIFIC COMPETITIVE ADVANTAGES ............................................................................................. 7
I.
Size to Achieve Economic of Scale ......................................................................................... 7
II. Differentiation through Technology Innovation.................................................................... 7
III.
Diversification........................................................................................................................ 7
ECONOMIC ANALYSIS............................................................................................................................. 8
INTEREST RATE ......................................................................................................................................... 8
GDP .......................................................................................................................................................... 8
GOVERNMENT SPENDING .......................................................................................................................... 8
INDUSTRY ANALYSIS .............................................................................................................................. 9
SECTOR COMPOSITION ............................................................................................................................. 9
SECTOR CHARACTERISTICS ...................................................................................................................... 9
COMPANY ANALYSIS ............................................................................................................................ 10
SEGMENT ANALYSIS ................................................................................................................................ 10
FINANCIAL ANALYSIS ............................................................................................................................... 14
VALUATION ANALYSIS.............................................................................................................................. 16
CONCLUSION ........................................................................................................................................... 18
DECISION ................................................................................................................................................. 18
TARGET PRICE AND VALUATION.............................................................................................................. 18
INVESTMENT RATIONALE ......................................................................................................................... 19
EXHIBIT ...................................................................................................................................................... 20
EXHIBIT 1: SALES BY LINE OF BUSINESS (% OF TOTAL SALES) .............................................................. 20
EXHIBIT 2: EARNINGS BY LINE OF BUSINESS (% OF TOTAL PROFIT)....................................................... 20
EXHIBIT 3: PERFORMANCE OF INDUSTRIAL SECTOR VS 10 YEAR TREASURY BOND ............................ 21
EXHIBIT 4: REGRESSION RESULT FOR STOCK PRICE AGAINST 10-YEAR TREASURY .............................. 21
EXHIBIT 5: PERFORMANCE OF INDUSTRIAL SECTOR VS GDP ............................................................... 22
EXHIBIT 6: REGRESSION RESULT FOR STOCK PRICE AGAINST GDP...................................................... 22
EXHIBIT 7: PERFORMANCE OF INDUSTRIAL SECTOR VS GOVERNMENT SPENDING ............................... 23
EXHIBIT 8: REGRESSION RESULT FOR STOCK PRICE AGAINST GOVERNMENT SPENDING ..................... 23
EXHIBIT 9: COMPANIES WITHIN INDUSTRIALS SECTOR REPRESENTED IN S&P 500 ............................. 24
EXHIBIT 10: INCOME STATEMENT ........................................................................................................... 25
EXHIBIT 11: DUPONT ANALYTICS ............................................................................................................ 27
EXHIBIT 12: BALANCE SHEET.................................................................................................................. 28
EXHIBIT 13: CASH FLOW STATEMENT .................................................................................................... 30
EXHIBIT 14: DCF..................................................................................................................................... 32
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Company Overview
General Electric Company (GE) is a diversified industrial corporation engaged in
developing, manufacturing and marketing a wide variety of products for the generation,
transmission, distribution, control and utilization of electricity. The Company operated in
11 segments. On June 23, 2005, GE announced reorganization of its 11 businesses into
six industry-focused businesses effective July 5, 2005. The six businesses are GE
Infrastructure, GE Industrial, GE Commercial Financial Services, GE NBC Universal,
GE Healthcare and GE Consumer Finance. During the year ended December 31, 2004,
GE acquired the commercial lending business of Transamerica Finance Corporation.
Also in 2004, GE acquired Australian Financial Investments Group. On May 11, 2004,
GE completed the merger of NBC with Vivendi Universal Entertainment LLLP. In
December 2004, GE Infrastructure completed the acquisition of InVision Technologies,
Inc. Also in December 2004, GE sold a majority interest in Gecis.
GE Commercial Finance
GE Commercial Finance offers an array of services and products aimed at enabling
business worldwide to grow. GE Commercial Finance provides loans, operating leases,
financing programs, commercial insurance and reinsurance, and other services. GE
Commercial Finance is one of General Electric's largest "growth engines". With lending
products, growth capital, revolving lines of credit, equipment leasing of every kind, cash
flow programs, asset financing, and more, GE Commercial Finance plays a key role for
client businesses in over 35 countries. The industries served include healthcare,
manufacturing, fleet management, communications, construction, energy, aviation,
infrastructure and equipment, as well as many others. As indicated in Exhibit 1 and 2, GE
Commercial Finance has 27.86% of GE’s revenues and 20.56% of GE’s earning. GE
Commercial Finance has assets of over US$232 billion and is headquartered in Stamford,
Connecticut, USA.
GE Consumer Finance
GE Consumer Finance is a leading provider, under the GE Money brand, of credit
services to consumers, retailers and auto dealers in countries around the world. GE
Consumer Finance, with $151 billion in assets, is a leading provider of credit services to
consumers, retailers and auto dealers in 47 countries around the world. Based in
Stamford, Conn., GE Consumer Finance offers a range of financial products, including
private label credit cards, personal loans, bank cards, auto loans and leases, mortgages,
corporate travel and purchasing cards, debt consolidation and home equity loans and
credit insurance. As indicated in Exhibit 1 and 2, GE Consumer Finance has 10.29% of
GE’s revenues and 12.52% of GE’s earning.
GE Healthcare
GE Healthcare provides transformational medical technologies that are shaping a new
age of patient care. They are expert in medical imaging and information technologies,
medical diagnostics, patient monitoring systems, drug discovery, and biopharmaceutical
manufacturing technologies is helping clinicians around the world re-imagine new ways
to predict, diagnose, inform and treat disease, so their patients can live their lives to the
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fullest. GE Healthcare's broad range of products and services enable healthcare providers
to better diagnose and treat cancer, heart disease, neurological diseases, and other
conditions earlier. The Company’s vision for the future is to enable a new "early health"
model of care focused on earlier diagnosis, pre-symptomatic disease detection and
disease prevention. Headquartered in the United Kingdom, GE Healthcare is a $15 billion
unit of General Electric Company. GE Healthcare employs more than 43,000 people
committed to serving healthcare professionals and their patients in more than 100
countries. As indicated in Exhibit 1 and 2, GE Health Care has 8.8% of GE’s revenues
and 11.35% of GE’s earning.
GE Industrial
GE Industrial provides a broad range of products and services throughout the world,
including appliances, lighting and industrial products; factory automation systems;
plastics, silicones and quartz products; security and sensors technology, and equipment
financing, management and operating services.
Major appliances and related services for products such as refrigerators, freezers, electric
and gas ranges, cooktops and dishwashers are distributed to both retail outlets and direct
to consumers, mainly for the replacement market, and to building contractors and
distributors for new installations. Lighting products include a wide variety of lamps and
lighting fixtures. Electrical distribution and control equipment includes power delivery
and control products such as transformers, meters and relays. Also includes GE Supply, a
network of electrical supply houses. Products and services are sold in North America and
in global markets under various GE and private-label brands. High-performance
engineered plastics used in a variety of applications such as automotive parts, computer
enclosures, telecommunications equipment and construction materials are sold worldwide
to a diverse customer base consisting mainly of manufacturers. Markets are extremely
diverse for rentals, leases, sales and asset management services of commercial and
transportation equipment, measurement and sensing equipment (products and subsystems
for sensing temperature, flow rates, humidity, pressure and detection of material defects),
security equipment and systems (including card access systems, video and sensor
monitoring equipment integrated facility monitoring systems and explosive detection
systems), and a broad range of automation hardware and software. Products and services
are sold to commercial and industrial end-users, including utilities; original equipment
manufacturers; electrical distributors; retail outlets; airports; railways; and transit
authorities. Increasingly, products and services are developed for and sold in global
markets. As indicated in Exhibit 1 and 2, GE Industrial has 20.1% of GE’s revenues and
9.1% of GE’s earning.
GE Infrastructure
GE Infrastructure is one of the world's leading providers of fundamental technologies to
developed and developing countries, including aircraft engine, energy, oil and gas, rail
and water process technologies and services. GE Infrastructure also provides aviation and
energy leasing and financing services.
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Jet engines and replacement parts and repair and maintenance services for all categories
of commercial aircraft are sold worldwide to airframe manufacturers, airlines and
government agencies. Rail systems products and maintenance services include diesel
electric locomotives, transit propulsion equipment, motorized wheels for off-highway
vehicles, and railway signaling communications systems. Financial products to airlines,
aircraft operators, owners, lenders and investors include leases, aircraft purchasing and
trading, loans, engine/spare parts financing, pilot training, fleet planning and financial
advisory services. Power plant products and services are sold into global markets. Gas,
steam and aeroderivative turbines, generators, combined cycle systems, controls and
related services are sold to power generation and other industrial customers. Renewable
energy solutions include wind turbines and hydro turbines and generators. Advanced
turbomachinery products and related services for the oil and gas market include total
pipeline integrity solutions. Substation automation, network solutions and power
equipment are sold to power transmission and distribution customers. Chemical water
treatment program services and equipment include mobile treatment systems and
desalination processes. Financial products to the global energy industry include
structured equity, leveraged leasing, partnerships, project finance and broad-based
commercial finance. As indicated in Exhibit 1 and 2, GE Infrastructure has 24.45% of
GE’s revenues and 33.76% of GE’s earning.
NBC Universal
NBC Universal is one of the world's leading media and entertainment companies in the
development, production, and marketing of entertainment, news, and information to a
global audience. Formed in May 2004 through the combining of NBC and Vivendi
Universal Entertainment, NBC Universal owns and operates a valuable portfolio of news
and entertainment networks, a premier motion picture company, significant television
production operations, a leading television stations group, and world-renowned theme
parks. NBC Universal is 80% owned by General Electric and 20% owned by Vivendi
Universal. Principal businesses are the furnishing of U.S. network television services to
230 affiliated stations, production of television programs, the production and distribution
of motion pictures, operation of 30 VHF and UHF television broadcasting stations,
operation of cable/satellite networks around the world, operation of theme parks, and
investment and programming activities in multimedia and the Internet. As indicated in
Exhibit 1 and 2, NBC Universal has 8.43% of GE’s revenues and 12.71% of GE’s
earning.
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Firm Specific Competitive Advantages
GE has thrived because the company has several sustained competitive advantages.
I. Size to Achieve Economic of Scale
GE has used its size to help it grow. Its depth allows the Company to lead in big
markets by providing unmatched solutions for their customers; its breadth allows the
Company to spread concepts across the Organization, leveraging one small idea to
create a big financial gain; and its financial strength allows the Company to take the
risks required to grow. Altogether, its sheer size helps the Company to achieve
economic of scale and operates at its efficiency.
Recent history provides some examples of the advantages of size. GE’s commercial
aviation business endured a terrible cycle after the 9/11 tragedy. Yet, the Company
was able to sustain R&D investment at more than $1 billion each year so that it could
launch eight new engines by 2006. At the same time, its market knowledge allowed
the Company to keep virtually all of its leased aircraft “flying” while helping the
industry to restructure. The Company’s financial expertise and knowledge of aviation
helped GE win even during a time of market stress.
II. Differentiation through Technology Innovation
Products, services and content represent GE’s value added and are the key to its
growth. The Company invests about $14 billion each year in this intellectual
foundation for the Company, which includes R&D, content development and
marketing. The scale of this investment — the depth and the breadth — makes GE
unique.
“Cleaner Coal” technology is a great example of GE’s depth. This technology is
important for its customers and the global economy. The world has about a 200-year
supply of coal. Its Cleaner Coal technology will produce energy with emissions
approaching that of gas. The cost to produce Cleaner Coal energy is not competitive
today, but the GE manages to reduce it substantially through technology innovation.
III. Diversification
The foundation of GE is a set of leadership businesses constructed to achieve longterm targets of more than 10% annual earnings growth and 20% return on total capital
(ROTC). In 2005, GE restructured the Company into six businesses focused on the
broad markets: Infrastructure, Commercial Finance, Consumer Finance, Healthcare,
NBC Universal and Industrial. Each business has scale, market leadership and
superior customer offerings.
Over the past few years, GE has aggressively strengthened its portfolio. Since 2002,
GE has completed $65 billion of acquisitions, and announced or completed
approximately $30 billion of divestitures. At the same time, the Company was able to
sell of its unprofitable insurance business to cut off the loss. As a result, the
Company’s organic growth has expanded to 8% versus an historical level of 5%.
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Economic Analysis
Interest Rate
In the 18 months since the Federal Reserve launched its most aggressive credit-tightening
crusade since the Carter administration, the Dow Jones Industrial Average has risen just
2%. As indicated in Exhibit 3, the performance of the sector is negatively correlated to
the 10-year treasury rate. This correlation can be further quantified by my regression
analysis, as shown in Exhibit 4.
The outlook on the interest rate is quite positive. Alan Greenspan and the new chairman
Ben Bernanke have gradually changed their tone to reduce the likelihood of continuous
rate hike. The general consensus is there might be another one of two. The conventional
wisdom, partially supported the regression analysis, believe that once the central bank
stops its shenanigans, stock will be free to soar.
GDP
The growth of GDP around the world seems to continue its momentum. The GDP of
emerging market countries as a group has been growing at roughly double the rate of
advanced economies in recent years. Aggregate GDP of the developing countries grew
6.6 percent in 2004, while the GDP of high-income nations grew at 3.1 percent. The
expansion among high-income countries is projected to be stable during 2006, at about
2.5 percent, before picking up a bit in 2007. Growth in developing economies is projected
to be 5.9 percent for 2005 and to remain above 5.5 percent for 2006 and 2007. Growth of
China and India is estimated to continue for decades in a range of 7%-8%. Domestically,
due to rebuilding efforts, solid levels of business investment, and a rebound in consumer
spending are expected to produce above-trend GDP growth. Given the strong correlation
between GDP and stock performance, as shown in Exhibit 5 and 6, I expect to see GE’s
continue to be strong in the next few years.
Government Spending
Another economic factor that might affect the performance of the stock is Government
Spending. As evidenced in Exhibit 7 and 8, there is a very strong positive correlation
between stock performance and Government Spending.
Domestically, the outlook on the future government spending is also very positive, given
the reelection of President Bush and the on-going oversea conflicts. Internationally,
government spending also shows no sign of slowing down. Especially in the developed
countries, I expect to see government continue to build up their infrastructure in order to
continue to support their growth in economic.
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Industry Analysis
Sector Composition
The industrial sector primarily consists of companies whose businesses are dominated by
one of the following activities:
Industry Groups
Capital Goods:
Commercial Services
and Supplies:
Transportation:
Sub-industries
Aerospace and Defense
Building Products
Construction and Engineering
Electrical Equipment
Industrial Conglomerates
Machinery
Trading Firms and Distributors
Commercial Printing
Data Processing
Diversified Services
Employment Services
Environmental Services
Office Services and Supplies
Air Freight and Carriers
Airlines
Marine, Road and Rail
Sector Characteristics
The sector is a $1.3 trillion sector and represents about 11.12% in S&P 500. Its life Cycle
is mature, with many established companies. Most of them act cyclically and are value
companies. Majority of the companies have past growth stages. Together, there are 53
companies represented in S&P 500, as shown in Exhibit 9. The table below shows the
performance of the Industrials Sector in different markets.
In addition, as indicated in Exhibit 3, 5, and 7, it seems to us that the industrials sector
generally performs very well in the current economic environment.
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Company Analysis
Segment Analysis
Among all the business segments, GE Infrastructure is considered to be the most
important line of business. Though ranked second in sales volume, GE Infrastructure
continues to be the most profitable line of business. This trend is likely to continue when
the economic continue to expand globally, especially China and India. On the other hand,
insurance business could be considered GE’s problem child. GE has been steadily
unloading all its insurance assets over the past few years. GE Chairman and Chief
Executive Jeffrey Immelt is reported as calling the insurance a "tough strategic fit." That
business has been a major money loser over the past five years for GE. The company will
oddly hold on some of its North American life reinsurance assets.
The Company’s organic growth has expanded to 8% versus an historical level of 5%. At
the same time, its ROE in the financial services businesses has increased to 26%. The
Company’s businesses fit well with the big demographic themes of the era. As a result, I
believe GE is positioned to grow organically at two to three times the global gross
domestic product (GDP).
I. GE Commercial Finance
Commercial Finance, led by Mike Neal, represents about 20% of its segment profit. It
grew earnings 20% in 2005 and expanded ROE to 24%. It had another year of 18%
volume growth, while losses were at an all-time low. The Company’s markets are
strong. It has 8,500 salespeople, so is seeing more deals than its competition. The
combination of strong origination, low cost of funds and great risk management
allows the Company to grow earnings through every cycle.
The company has driven significant growth outside the U.S. In Europe, it has created
strong platforms in real estate, leasing and commercial lending. The Company built
local capabilities and its earnings have grown four times since 2000. The Company is
expecting a similar trajectory in Asia.
Nearly all of its Commercial Finance assets are in industry verticals, such as
healthcare, real estate and entertainment. This gives the Company unique origination,
funding and risk management advantages. Its financing in trucking is a great
example. It has $10 billion in assets, 90,000 customers and deep domain expertise.
This business is too “grunty” for some finance companies. For GE Commercial
Finance, it is a 20% ROE “jewel.” The Company has less than 2% share of the global
commercial finance market and it should be able to grow 10–15% in 2006 and
beyond.
II. GE Consumer Finance
Consumer Finance, led by Dave Nissen, represents about 15% of its segment profit. It
had a 21% earnings gain in 2005, with a 29% ROE. Its strategy is to expand globally,
while making organic growth a core competency.
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Consumer Finance is expanding globally, with 70% of its earnings outside the U.S. It
is small in big markets, with substantial room for growth. It has also built significant
capability in developing markets. In 2005, the Company has made major investments
in China, Korea, Spain, Central America, Turkey and the Philippines. Its earnings in
developing markets grew 30% for the year.
Consumer Finance has averaged 16% growth annually for the last five years. In 2005,
it introduced 364 new products, expanding its products per consumer by almost 20%.
Consumer Finance is benefiting from accelerating consumer wealth around the world.
The Company expects 15% growth in 2006 and beyond.
III. GE Healthcare
GE Healthcare business, led by Joe Hogan, represents about 10% of its segment
profit. The Company grew revenues by 13% and earnings by 17% in 2005. This
business continues to benefit from demographics and new technology.
There are three technical themes that GE will target to cement its role as an industry
leader. GE Health care will lead in molecular imaging, which allows physicians to
see disease at the molecular level. The Company is working to commercialize more
diagnostic compounds. One example is Pittsburgh Compound B (PIB), which will be
used along with positron emission tomography (PET) imaging to spot the onset of
neurological disorders and diseases such as breast cancer and heart failure, while
tracking the impact of therapy.
The Company is also working on the convergence between diagnostics and therapy.
It has active partnerships underway with companies such as Eli Lilly and Roche to
impact product development in cardiology, cancer and neurology. The Company’s
diagnostic technologies can help to accelerate drug discovery by leveraging the
Company’s information and process skills.
Information technology is critical to increasing the quality and lowering the cost of
healthcare. A key strategy in Healthcare is building an effective and broad-based
Electronic Medical Record (EMR). GE’s pioneering position in the EMR will be
enhanced through its acquisition of IDX and a unique collaboration with one of
America’s leading providers, Intermountain Healthcare. GE Healthcare should be
able to grow earnings by 10–15% into the future.
IV. GE Industrial
GE Industrial, led by John Rice, represents about 10% of its segment profit. It had a
strong year in 2005, with revenue growth of 6% and earnings up 40%. Its Industrial
businesses are the most cyclical part of GE and have benefited from an improving
economy. The Company has increased its margins by launching great new products,
pricing ahead of inflation and reducing structural cost.
The Appliances business is representative of its strategy in these industrial markets.
Over the last three years, it has introduced 225 new products. The Company has
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gained high-end market share in its Monogram and Profile lines. The Company has
lowered costs by sourcing products from Mexico and China. As a result, its margin
rates have expanded. The Company generated approximately $2 billion in cash over
the last three years with a 60% ROTC. Winning in these businesses requires strong
execution. GE Industrial is positioned for another year of 15% growth in an
expanding global economy.
V. GE Infrastructure
Infrastructure, led by Dave Calhoun, represents about 35% of its segment profit. In
2005, revenues grew 12% and earnings grew 14%. GE competes in big infrastructure
markets such as energy, aviation, rail, water and oil & gas. Its business model is: win
with technology, grow with service and serve customers globally.
Orders of its Infrastructure products grew 13% in 2005. New products are at the heart
of its growth. The Company captured more than $6 billion of commercial aircraft
engine orders in 2005, behind the success of the CFM engine and new launches of the
Company’s GE90 and GEnx engines. Its advanced Evolution locomotive captured
market-share leadership and it will ship more than 900 units in 2006. The Company’s
renewable energy portfolio received more than $3 billion in orders in 2005, up almost
15%.
Based on the Company’s product wins, its installed base grew by 6% in 2005. The
Company now has $81 billion of long-term service agreement commitments, creating
a high-margin revenue source for the future. Its Infrastructure service revenues
totaled $21 billion in 2005 and are growing 10% annually.
More than 60% of the Company orders are from customers outside the U.S. The
Company is benefiting from the massive investment going into developing country
infrastructure, predicted to be $3 trillion over the next 10 years. As energy costs
increase, the Company benefits from technologies that support exploration as well as
products that create fuel conservation for its customers. The Company’s
Infrastructure business is projecting 10% revenue growth and more than 15%
earnings growth for 2006 and into the future.
VI. NBC Universal
NBC Universal (NBCU), led by Bob Wright, represents about 10% of its segment
profit. It grew revenues by 14% and earnings by 21% in 2005. Its strategy is to
become a content leader with diversified revenue streams. The Company struggled in
a visible area of its franchise, primetime entertainment. In fact, its ratings declined by
20% as it was unable to replace some aging hits with solid new programming.
Content is highly valued in a digital world. At the same time, The Company needs to
adjust its approach to consumers and advertisers based on digital technologies. There
is a growing market for content, but it will require creativity in the Company’s
approach to customers who want access to more digital platforms. NBCU is expected
to hold earnings flat in 2006 as it strengthen its primetime programming. Over the
long term, this business is expected to grow earnings 10% annually.
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VII. Insurance Exit
In 2002, GE expressed its intention to exit the Insurance business. At that time, the
Company had one-third of the Company’s equity in Insurance, with no return. It had
taken on excess leverage to grow the business and needed to reduce $17 billion of
debt. Adverse development on reinsurance that the Company had written in the late
’90s required reserve strengthening of close to $10 billion from 2001 through 2005.
The Company has reduced its exposure to Insurance in a disciplined fashion and its
exit is now in sight. In November, the Company announced the sale of its reinsurance
business to Swiss Re for $8.5 billion including the assumption of debt. While another
insurance loss — $2.9 billion in 2005 — was hard to accept, this action provides a
path to final resolution for its investors. All insurance claims will become the
responsibility of the acquirer. As a part of this transaction, GE will obtain an
approximate 12% ownership of Swiss Re. I believe that Swiss Re, as a dedicated
leader in this industry, is well positioned to perform.
Exiting Insurance is important for GE. Its poor performance in insurance has
dampened a strong performance by the rest of the Company. I feel the Company will
now benefit by having a faster-growth, less volatile Company.
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Financial Analysis
I. Income Statement Analysis
A complete income statement is provided in exhibit 10. It includes data from the past
6 years as well as projection for the next 3 years. Analyzing the income statement
revealed that sales has been driving GE’s growth in the past. I believe sales continue
to be the main force in driving the growth of the company.
As for the main driver of earnings, I have analyzed the data obtained from Dupont
Analytics, as shown in Exhibit 11. Based on Dupont Analytics, ROE=
(EBIT/SALES) (EBT/EBIT) (1-Tax Rate) (SALES/ASSETS) (ASSETS/EQUITY).
In short, ROE is a function of Margin %, Interest Burden, Tax Burden, Assets
Turnover and Leverage. Use this definition and the data below, I found GE’s ROE
has the strongest correlation with Leverage then Margin. As shown, in the last four
years, when GE’s leverage goes up, its ROE goes up as well.
II. Balance Sheet Analysis
A complete balance sheet that contains data from the past 5 years is provided in
Exhibit 12. A quick analysis of GE cash status can be revealed by computing its
quick ratio. As indicated later in the ratio analysis section, the company’s quick ratio
has been very consistent over the last 5 years. Also examining the company’s
operation ratios below, I found the company’s management in Inventory and
Receivable to be very consistent over the last 5 years. When comparing to industry
average, I can see GE has done a very good job in turning over its receivable as it is
much faster than the industry average.
Operating Ratios
Asset Turnover
Inventory Turnover
Effective Tax Rate
Receivables Turnover
Receivables per Day Sales
12/04
0.2
5.8
16.7
12.1
33.86
12/03
0.2
4.9
21.4
12.4
29.07
12/02
0.2
5.3
19.6
12.9
29.42
Ind. Avg.
(12/05)
0.4
5.2
23.2
5.0
72.95
III. Cash Flow Analysis
A quick look at the cash flow analysis tells that majority of GE’s cash flow coming
from its operating activities. On the other hand, GE’s cash flow from its investing
activities has been in red for the last 5 years. Cash flow from the Company’s
financing activities is in the middle. A complete cash flow statement from the past 5
years is included in Exhibit 13.
IV. ROE Analysis
Analyzing the Company’s profitability ratios below tells us that GE has performed
better than industry average in ROE, Pre-Tax Profit Margin %, Post-Tax Profit
Margin %, and Net profit Margin %. The Company’s ROA and Return on Invested
Capital, however, is slightly lower than the industry average. The company has also
GE Stock Report - Ping.doc
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been making improvement to its debt situation as indicated by the Debt to Equity
ratio.
Profitability Ratios
Return on Equity (ROE)
Return on Assets (ROA)
Return on Invested Capital
Pre-Tax Profit Margin %
Post-Tax Profit Margin %
Net Profit Margin %
Gross Margin (%)
12/04
12/03
15.0
19.7
2.2
2.4
5.1
6.3
13.9
15.2
11.0
11.7
11.0
11.7
Return on Equity
Ind. Avg.
12/02
(12/05)
23.7
14.7
2.6
3.0
7.4
6.4
14.7
11.8
11.6
8.6
11.6
8.5
Debt to Equity
V. Ratio Analysis
Below is a list of ratios that have been calculated from Income Statement, Balance
Sheet and Cash Flow Statement. As discuss earlier, the company quick ratio has been
very consistent and inline with the industry average. Same thing can be said of
current ratio, though a little bit better than industry average. Its debt to equity ratio
has been improved since 2002 and its leverage ratio is heading toward the industry
average as well. Everything seems to indicate the company is heading to the right
direction.
Liquidity Ratios
Current Ratio
Quick Ratio
Debt/Equity
Leverage Ratio
12/04
0.8
0.8
1.93
6.8
12/03
0.9
0.8
2.15
8.2
12/02
0.8
0.8
2.21
9.0
Ind. Avg.
(12/05)
1.0
0.8
1.29
4.9
VI. Earning Estimate
The consensus mean estimate is $38. My estimate came out to be $37.83 based on my
discount cash flow model, as shown in exhibit 14. My discount cash flow models
(which value the stock by adding the discounted sum of free cash income expanding
at a projected 10% CAGR over the next 10 years, and at 4.5% thereafter) indicate a
value of $37.83 a share. My projected 10% free cash EPS CAGR over the next 10
years and 4.5% thereafter is based on the relative valuation model, which compares
the company's earnings yield to 10-year AAA-rated bond yields. Based on the 2006
EPS estimate of $1.93, the stock is generating an earnings yield of 5.26%, near the
current 10-year average AAA bond yield of 5.2%.
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Valuation Analysis
I. Relative Valuation – GE vs Sector
Compared to the performance of the industrial sector, both 3-year and 10-year data
below have shown that GE stock is relatively cheap in every valuation. Again, the
gaps are narrower when using 3 year data.
Relative to Sector
Valuation
(10 Years)
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High Low Mean Current
Relative to Sector
Valuation
(3 Years)
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High Low Mean Current
1.73
2.59
2.6
1.69
1.9
1.21
1.76
1.5
1.03
1.33
0.9
1.4
1
0.8
1
0.9
1.5
1
0.9
1
1.13
1.65
1.63
1
1.26
1.12
1.58
1.14
0.96
1.14
1.09
1.52
1.05
0.91
1.06
1.09
1.52
1.05
0.91
1.06
II. Relative Valuation – GE vs SP500
Looking at the 10-year relative performance of GE and SP500, the valuations of GE’s
stock show mix results. While P/S and P/EBITDA show GE stock is relative
expensive, P/B and P/CF suggest otherwise. P/E valuation indicates its performance
is inline with SP500.
Relative to SP500
High Low Mean Current
(10 Years)
P/Forward E
1.5
0.9
1.15
1.15
P/S
2.17
1.3
1.6
2.01
P/B
2.6
1.1
1.68
1.09
P/EBITDA
1.9
0.8
1.19
1.41
P/CF
1.84
1
1.32
1.08
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3-year data reveals similar valuations but with two differences. First, P/E valuation
now shows the stock is relatively cheap when compared to SP500. Second, the gaps
are narrower when comparing to the 10-year data.
Relative to SP500
High Low Mean Current
(3 years)
P/Forward E
1.34
0.9
1.2
1.15
P/S
2.17
1.3
1.59
2.01
P/B
1.57
1.1
1.23
1.09
P/EBITDA
1.59
0.8
1.08
1.41
P/CF
1.4
1
1.2
1.11
III. Absolute Valuation - GE
When looking at the 10-year data below, I found that GE stock is a LOT cheaper than
its 10-year means in every valuation measure. This is especially true when comparing
the company’s current P/E ratio (16.7) to its 10-year average (21.6). Please note
Absolute
High Low Mean Current Target
Valuation
Multiple
(10 years)
A.
P/Forward E
P/S
P/B
P/EBITDA
B.
40.2
4.89
13.1
18.1
C.
14.3
1.7
3.2
6.1
D.
21.6
2.52
5.9
9.4
E.
16.7
2.16
3.2
7.5
F.
20
2.4
4
9
When using the 3-year data, though still showing GE stock is cheaper than its 3-year
averages in every valuation measure, the gaps are again narrower.
Absolute
High Low Mean Current Target
Valuation
Multiple
(3 years)
A.
B.
C.
D.
E.
F.
P/Forward E
21.4 14.3
18.9
16.7
19
P/S
2.59
1.7
2.29
2.16
2.3
P/B
4.6
3.2
3.6
3.2
3.6
P/EBITDA
10.2
6.3
8.4
7.5
8.5
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Conclusion
Decision
I believe GE merits a hold opinion, as the stock is trading at a modest discount to my 12month target price of $37.83. The stock currently is traded at $33.06, which signifies a
potential upside of 12.83%. Its dividend yield is roughly 3.03%. Altogether, it represents
a potential total return of 15.86%.
Target Price and Valuation
My discount cash flow models (which value the stock by adding the discounted sum of
free cash income expanding at a projected 10% CAGR over the next 10 years, and at
3.0% thereafter) indicate a value of $37.83 a share (my projected 10% free cash EPS
CAGR is much lower than the 15% consensus CAGR). As such, my 12-month target
price is $37.83. My relative valuation model, which compares a company's earnings yield
to 10-year AAA-rated bond yields, supports my opinion that GE shares are fairly valued
at current price levels. Based on my 2006 EPS estimate of $1.93, the stock is generating
an earnings yield of about 5.5%, modestly higher than current 10-year average AAA
bond yields of 5.2%.
A cross check with the different target multiple, as shown in the tables below also
suggests my estimate is very much inline with the consensus.
Absolute
High Low Mean Current Target
Target
Target
Valuation
Multiple E, S, B,
Price
etc/Share (FxG)
(10 years)
A.
B.
C.
D.
E.
F.
G.
H.
P/Forward E
40.2 14.3
21.6
16.7
20
$1.91 $38.19
P/S
4.89
1.7
2.52
2.16
2.4
$16.06 $38.54
P/B
13.1
3.2
5.9
3.2
4
$10.65 $42.60
P/EBITDA
18.1
6.1
9.4
7.5
9
$4.35 $39.19
Absolute
Valuation
(3 years)
A.
P/Forward E
P/S
P/B
P/EBITDA
GE Stock Report - Ping.doc
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High Low Mean Current Target
Target
Target
Multiple E, S, B,
Price
etc/Share (F x G)
B.
C.
D.
E.
F.
G.
H.
21.4 14.3
18.9
16.7
19
$1.91
$36.29
2.59
1.7
2.29
2.16
2.3
$16.06
$36.94
4.6
3.2
3.6
3.2
3.6
$10.65
$38.35
10.2
6.3
8.4
7.5
8.5
$4.35
$37.01
Page 18 of 34
Created by Ping-Lang Chu
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Investment Rationale
Risks to my recommendation and target price include any unexpected, structural
deterioration of GE's primary industrial, financing or media end-markets. Additional risks
include any sudden, rapid structural deterioration of market positions, competitive
positions and/or business economics of GE's main industrial, financing and media
businesses.
Looking at GE's longer-term financial prospects, I do not think the company will be able
to show EPS growth better than a 10% compound annual growth rate and debt-adjusted
ROE of 20%. I believe GE's sheer size will make it very difficult to match historical
growth rates for revenue, EPS and ROE. Ironically, I think increasing sales contributions
from the financing and leasing segment (45% of revenues) could restrict long-term
profitability, potentially leading to a narrowing of the stock's P/E multiple.
However, the future for GE appears to be much brighter than the scenario described
above. First, the global expansion of the economic will help the company maintain its
annual 8% organic growth target. Especially in the emerging markets, I believe GE is
positioned as well as any other companies in the industry to tap the trend. Second,
government spending, both domestically and abroad, is likely to continue to increase.
Domestically, with the re-election of President Bush, the on-going oversea conflict is
unlikely to cease in the short time. Government spending abroad, especially developing
countries, is likely to continue to increase in order to support their growth in economic.
Lastly, I expect we should see the interest rate stop increasing in the near future.
Given the above assessments, I expect to see GE use its size to its advantage in
harvesting the growth of economic and government spending while its diversified nature
will help keeping its exposure to the risks at minimal.
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Exhibit
Exhibit 1: Sales by line of business (% of total sales)
For the years
ended
December 31
(In millions)
REVENUES
Commercial
Financial
Services
Consumer
Finance
Healthcare
Industrial
Infrastructure
NBC Universal
Corporate items
and eliminations
CONSOLIDATED
REVENUES
2004
2003
% of
Sales
2002
% of
Sales
2001
% of
Sales
2000
% of
Sales
% of
Sales
$42,594
27.86%
$43,121
32.03%
$38,984
29.48%
$38,498
30.46%
$40,905
31.37%
15,734
13,456
30,722
37,373
10.29%
8.80%
20.10%
24.45%
12,845
10,198
24,988
36,569
9.54%
7.57%
18.56%
27.16%
10,266
8,955
26,154
40,119
7.76%
6.77%
19.78%
30.34%
9,508
8,409
26,101
36,419
7.52%
6.65%
20.65%
28.82%
9,320
7,275
29,541
30,133
7.15%
5.58%
22.66%
23.11%
12,886
8.43%
6,871
5.10%
7,149
5.41%
5,769
4.57%
6,797
5.21%
101
0.07%
49
0.04%
599
0.45%
1669
1.32%
6414
4.92%
152,866
100.00%
134,641
100.00%
132,226
100.00%
126,373
100.00%
130,385
100.00%
Exhibit 2: Earnings by line of business (% of total profit)
For the years
ended December 31
(In millions)
2004
2003
% of
total
profit
2002
% of
total
profit
2001
% of
total
profit
2000
% of
total
profit
% of
total
profit
SEGMENT PROFIT
Commercial Financial
Services
$4,139
20.56%
$5,009
25.54%
$2,075
11.47%
$3,663
19.61%
$4,604
26.12%
Consumer Finance
2,520
12.52%
2,161
11.02%
1,799
9.94%
1,602
8.58%
1,295
7.35%
Healthcare
2,286
11.35%
1,701
8.67%
1,546
8.54%
1,498
8.02%
1,321
7.50%
Industrial
1,833
9.10%
1,385
7.06%
1,837
10.15%
2,642
14.14%
3,251
18.45%
Infrastructure
6,797
33.76%
7,362
37.53%
9,178
50.73%
7,869
42.12%
5,545
31.46%
NBC Universal
2,558
12.71%
1,998
10.19%
1,658
9.16%
1,408
7.54%
1,609
9.13%
Total segment profit
20,133
100.00%
19,616
100.00%
18,093
100.00%
18,682
100.00%
17,625
100.00%
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Exhibit 3: Performance of Industrial Sector vs 10 Year Treasury Bond
S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) WEEKLY PRICE (Left) StockVal ®
(ECN-O)US TREASURY BOND 10 YR % (Right)
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
46.8
SP-20 16.0
38.4
14.4
31.6
13.2
25.6
11.6
21.2
10.8
17.2
9.6
14.4
8.8
8.0
11.6
9.6
7.2
8.0
6.4
6.4
5.6
5.2
5.2
4.8
4.4
ECN-O>
3.6
4.4
4.0
2.8
3.6
2.4
2.0
3.2
1.6
2.8
Exhibit 4: Regression result for stock price against 10-year treasury
Regression Statistics
Multiple R
0.76
R Square
0.57
Adjusted R Square
0.57
Standard Error
9.49
US Treasury Bond 10yrs % Line Fit
Plot
60
Observations
P ric e
40
0
-200.00
119.00
Coefficient
Price
Predicted Price
20
5.00 10.00 15.00 20.00
US Treasury Bond 10yrs %
Standard
Error
t Stat
Intercept
47.06
2.61
18.04
US Treasury Bond 10yrs
%
-3.95
0.32
-12.46
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Page 21 of 34
Created by Ping-Lang Chu
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Exhibit 5: Performance of Industrial Sector vs GDP
S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) WEEKLY PRICE
(ECN-O)GROSS DOMESTIC PRODUCT:REAL ($BIL) (Right)
StockVal ®
(Left)
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
46.8
11300
ECN-O>
SP-20
38.4
10700
31.6
10100
25.6
9600
21.2
9100
17.2
8600
14.4
8100
11.6
7700
9.6
7200
8.0
6900
6.4
6500
5.2
6100
4.4
5800
3.6
5500
2.8
5200
2.4
4900
2.0
4700
1.6
4400
Exhibit 6: Regression result for stock price against GDP
Regression Statistics
GDP real Line Fit Plot
Multiple R
0.95
60
0.91
Adjusted R Square
0.91
Standard Error
4.30
40
P r ic e
R Square
20
0
0
Observations
119.00
-20
5000
10000
15000
GDP real
Coefficients
Standard Error
t Stat
P-value
Intercept
-35.80
1.55
-23.08
0.00
GDP real
0.01
0.00
34.80
0.00
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Exhibit 7: Performance of Industrial Sector vs Government Spending
S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) WEEKLY PRICE (Left) StockVal ®
(ECN-O)FEDERAL GOVT EXPENDITURES ($BIL) (Right)
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
46.8
2620
ECN-O>
SP-20
2340
38.4
31.6
2080
25.6
1840
21.2
1640
17.2
1460
14.4
1300
11.6
1160
9.6
1020
8.0
920
6.4
820
5.2
720
4.4
640
3.6
580
520
2.8
460
2.4
2.0
400
360
1.6
Exhibit 8: Regression result for stock price against Government Spending
Regression Statistics
Gov exp Line Fit Plot
Multiple R
0.91
R Square
0.84
50
40
Adjusted R Square
0.83
P r ic e
30
20
10
Standard Error
5.88
0
-10 0
Observations
500
1,000
119.00
Coefficients
1,500
2,000
3,000
Gov exp
Standard Error
t Stat
P-value
Intercept
-12.40
1.30
-9.53
0.00
Gov exp
0.02
0.00
24.34
0.00
GE Stock Report - Ping.doc
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2,500
Page 23 of 34
Created by Ping-Lang Chu
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Exhibit 9: Companies within Industrials Sector represented in S&P 500
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Page 24 of 34
Created by Ping-Lang Chu
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Exhibit 10: Income Statement
General Electric Company
and consolidated affiliates
Statement of Earnings
FY
FY
FY
FY
FY
2008E
2007E
2006E
2005
2004
2003
2002
2001
2000
TOTAL REVENUES
COST OF GOODS AND
SERVICES SOLD
$210,321
$187,786
$167,666
$149,702
$152,363
$134,187
$131,698
$125,913
$129,853
$84,128
$75,114
$67,066
$59,201
$61,759
$51,206
$52,856
$49,097
$51,823
GROSS REVENUE
$126,192
$112,672
$100,600
$90,501
$90,604
$82,981
$78,842
$76,816
$78,030
SG&A
$58,890
$52,111
$46,108
$42,884
$38,148
$32,234
$28,714
$28,162
$30,993
OPERATING INCOME
INTEREST AND OTHER
FINANCIAL CHARGES
$67,303
$60,561
$54,492
$47,617
$52,456
$50,747
$50,128
$48,654
$47,037
$21,032
$18,779
$16,767
$15,187
$11,907
$10,432
$10,216
$11,062
$11,720
OTHER EXPENSES
$16,826
$15,023
$13,413
$10,301
$20,443
$20,411
$21,021
$17,891
$16,871
EARNINGS BEFORE
ACCOUNTING
CHANGES/FROM
CONTINUING OPERATION
AND BEFORE INCOME
TAXES
$29,445
$26,760
$24,312
$22,129
$20,106
$19,904
$18,891
$19,701
$18,446
For the years ended
December 31
(In millions; per-share
amounts in dollars)
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Page 25 of 34
FY
Created by Ping-Lang Chu
3/6/2006
FY
FY
FY
Provision for income taxes
EARNINGS BEFORE
ACCOUNTING
CHANGES/FROM
CONTINUING OPERATION
Cumulative effect from
discontinuing operation
$5,889
$4,817
$4,376
$3,854
$3,513
$4,315
$3,758
$5,573
$5,711
$23,556
$21,943
$19,936
$18,275
$16,593
$15,589
$15,133
$14,128
$12,735
$0
($300)
($900)
($1,922)
($587)
($1,015)
($444)
$23,556
$21,643
$19,036
$16,353
$16,593
$15,002
$14,118
$13,684
$12,735
$2.36
$2.14
$1.83
$1.55
$1.60
$1.50
$1.42
$1.38
$1.29
$2.36
$2.17
$1.92
$1.73
$1.60
$1.56
$1.52
$1.42
-
($0.06)
($0.10)
($0.04)
-
-
-
NET EARNINGS
Per-share amounts
Basic earnings per share
Before accounting
changes/Continuing ops
Effect of accounting
changes/Discount ops
Diluted earnings per
share
Before accounting
changes/Continuing ops
Effect of accounting
changes/Discount ops
WEIGHTED AVERAGES
SHARES OUTSTANDING BASIC
WEIGHTED AVERAGES
SHARES OUTSTANDING DILUTED
GE Stock Report - Ping.doc
Confidential
-
-
-
($0.18)
-
$2.35
$2.13
$1.82
$1.54
$1.59
$1.49
$1.41
$1.36
$2.35
$2.16
$1.91
$1.72
$1.59
$1.55
$1.51
$1.41
-
($0.03)
($0.09)
($0.18)
($0.06)
($0.10)
($0.04)
-
-
-
$1.27
9,970
10,120
10,400
10,570
10,400
10,019
9,947
9,932
9,897
10,010
10,160
10,440
10,611
10,445
10,075
10,028
10,052
10,057
Page 26 of 34
Created by Ping-Lang Chu
3/6/2006
Exhibit 11: Dupont Analytics
INT
TAX
ASSET
MARGIN% BURDEN
BURDEN% TURN
LEVERAGE
EBIT
EBT
T Sales
Assets
------- ------- 1 - ---- ------- ------- ROE
Acct
ROE
Sales
EBIT
EBT
Assets
Equity
Rpt%
Adj%
Adj%
2004
2003
2002
2001
2000
14.04
15.77
14.78
16.24
14.77
0.95
0.96
0.97
0.96
0.96
82.12
77.98
80.02
71.71
69.04
0.22
0.22
0.25
0.27
0.31
7.34
8.51
8.99
8.83
9.05
17.66
21.20
23.79
26.15
27.37
0.00
0.82
1.35
2.54
2.28
17.66
22.02
25.14
28.68
29.65
1999
1998
1997
1996
1995
14.61
14.29
13.18
14.40
14.83
0.95
0.94
0.93
0.95
0.94
68.80
68.98
73.38
67.37
67.51
0.29
0.30
0.32
0.32
0.33
9.35
9.00
8.79
8.24
7.55
26.32
25.36
25.02
23.97
23.48
4.38
4.05
0.00
0.00
0.00
30.70
29.40
25.02
23.97
23.48
1994
1993
1992
1991
1990
15.09
11.96
12.68
12.88
12.93
0.95
0.92
0.89
0.87
0.85
68.29
68.19
69.26
69.58
70.90
0.27
0.25
0.30
0.32
0.36
8.54
9.02
7.96
7.35
6.53
18.10
17.51
20.93
12.16
20.22
4.55
2.22
-2.61
6.03
-1.80
22.66
19.73
18.33
18.19
18.42
GE Stock Report - Ping.doc
Confidential
Page 27 of 34
Created by Ping-Lang Chu
3/6/2006
Exhibit 12: Balance Sheet
Consolidated
(Dollars in billions)
Assets
Cash & marketable
securities
Receivables
Inventories
12/31/2004
$
69.1
14.2
9.8
GECS financing
receivables - net
12/31/2003
$
135
10.7
8.8
282.7
247.9
12/31/2002
125.8
10.7
9.2
$
12/31/2001
109.5
9.6
8.6
$
242.9
12/31/2000
99.5
9.5
7.8
$
213.6
178.8
Property, plant &
equipment - net
Investment in GECS
Goodwill & intangible
assets
Other assets
63.1
-
53.4
-
78.5
100.8
55
136.7
46.2
93.2
35.1
76.6
27.4
73.9
Assets of discontinued
operations
132.3
-
-
-
-
$
Total assets
Liabilities and equity
Short-Term Borrowings
Long-Term Borrowings
Insurance reserves
$
47.2
42.1
-
40.0
-
-
750.5
$
647.5
$
575
$
495.1
$
436.9
152.4
212.7
48.1
$
157.7
172
136.3
$
181.9
140.6
135.9
$
198.9
79.8
114.2
$
164.8
82.1
106.2
Other liabilities &
minority interest
113.6
102.3
53.2
47.3
33.4
Liabilities of discontinued
operations
Shareowners' equity
112.9
110.8
79.2
63.7
54.8
50.5
GE Stock Report - Ping.doc
Confidential
Page 28 of 34
Created by Ping-Lang Chu
3/6/2006
Total liabilities and equity
$
750.5
$
647.5
$
575.3
$
495
$
437
(Dollars in millions)
Account Receivable
Current receivables
$
12/31/2004
14,233
$
12/31/2003
10,732
$
12/31/2002
10,681
$
12/31/2001
9,590
$
12/31/2000
9,502
$
282,467
25,709
10,771
333,180
$
247,906
27,541
9,747
295,926
$
199,917
31,585
11,444
253,627
$
147,032
27,317
11,105
195,044
$
143,299
23,802
11,714
188,317
$
24,729
$
19,950
$
18,874
$
18,158
$
14,853
Financing receivables
(investments in time sales,
loans and financing leases)
Insurance receivables
Other GECS receivables
Total Receivables
(Dollars in millions)
Accounts payable,
principally trade accounts
GE Stock Report - Ping.doc
Confidential
Page 29 of 34
Created by Ping-Lang Chu
3/6/2006
Exhibit 13: Cash Flow Statement
12/31/2004
12/31/2003
12/31/2002
12/31/2001
12/31/2000
16,593
15,002
14,118
13,684
12,735
-
587
1,015
444
-
8,385
6,956
5,998
5,370
5,039
-
-
-
1,719
2,697
-1,702
-849
-468
5,370
-464
1,127
534
874
802
-2,268
2,414
-409
-87
227
-5,062
1,426
197
-485
4,676
-
1,153
-537
-924
3,297
-
Insurance liabilities & reserves
4,961
1,679
9,454
8,194
-1,009
Provision for losses on financing
receivables
3,888
3,752
3,087
2,481
2,045
770
1,244
-1,267
-5,511
-1,806
36,484
30,289
29,488
32,195
22,690
-13,118
-9,767
-13,351
-15,520
-13,967
5,845
4,945
6,007
7,345
6,767
Net (increase) in GECS financing
receivables
-15,280
-14,273
-17,945
-13,952
-16,076
Payments for principal
businesses purchased
-18,703
-14,407
-21,570
-12,429
-2,332
2,842
10,599
-15,090
-5,558
-12,091
Net cash flows from investing
activities
-38,414
-22,903
-61,949
-40,114
-37,699
Net incr (decr)-borrow-maturs 90
days or less
-2,729
-11,107
-17,347
20,482
-8,243
Newly issued debt (maturity over
90 days)
61,659
67,545
95,008
32,071
47,645
Repays & other reducts (mature
over 90 days)
-47,106
-43,155
-40,454
-37,001
-32,762
Net earnings (loss)
Cumulative effect of accounting
changes
Depr & amort of prop, plant &
equipment
Amortization of goodwill & other
intangibles
Deferred income taxes
GE current receivables
Inventories
Accounts payable
GE progress collections
All other operating activities
Net cash flows from operating
activities
Additions to property, plant &
equipment
Dispositions of property, plant &
equipment
All other investing activities
GE Stock Report - Ping.doc
Confidential
Page 30 of 34
Created by Ping-Lang Chu
3/6/2006
Net disp (purch) of GE shares for
treasury
Dividends paid to share owners
All other financing activities
3,993
-8,278
-2,945
726
-7,643
-9,998
-985
-7,157
3,873
-2,435
-6,358
2,047
469
-5,401
12,942
Net cash flows from financing
activities
4,594
-3,632
32,938
8,806
14,650
Incr (decr) in cash & equivalents
during year
2,664
3,754
477
887
-359
Cash & equivalents at beginning
of year
12,664
8,910
8,433
8,195
8,554
Cash & equivalents at end of
year
15,328
12,664
8,910
9,082
8,195
Cash paid during the year for
interest
11,907
10,564
9,654
-11,125
-11,617
Cash recovered (paid) during
year for inc tax
1,339
1,539
948
-1,487
-2,604
GE Stock Report - Ping.doc
Confidential
Page 31 of 34
Created by Ping-Lang Chu
3/6/2006
Exhibit 14: DCF
Terminal
Discount Rate =
Terminal FCF
Growth =
10.0%
4.5%
DCF Valuation
(Dollars in millions)
Year
Revenue
Forecast
2005E
2006E
2007E
149,702
167,666
187,786
12.00%
12.00%
% Growth
2008E
2009E
2010E
2011E
2012E
2013E
231,353
254,488
279,937
307,930
338,723
12.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
210,321
2014E
372,596
2015E
409,855
Operating Income
47,617
54,492
60,561
67,303
69,406
76,346
83,981
92,379
101,617
111,779
122,957
Operating Margin
31.81%
32.50%
32.25%
32.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
30.00%
Interest and Othernet
25,488
30,180
33,802
37,858
40,487
44,535
48,989
53,888
59,277
65,204
71,725
17.03%
18.00%
18.00%
18.00%
17.50%
17.50%
17.50%
17.50%
17.50%
17.50%
17.50%
3,854
4,376
4,817
5,889
5,639
6,203
6,823
7,506
8,256
9,082
9,990
17.4%
18.0%
18.0%
20.0%
19.5%
19.5%
19.5%
19.5%
19.5%
19.5%
19.5%
-1,922
-900
-300
0
0
0
0
0
0
0
0
% of sales
-1.3%
-0.5%
-0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Net Income
16,353
19,036
21,643
23,556
23,280
25,608
28,169
30,985
34,084
37,492
41,242
% of Sales
Taxes
Tax Rate
Income from
discontinuous
operation, net
GE Stock Report - Ping.doc
Confidential
Page 32 of 34
Created by Ping-Lang Chu
3/6/2006
% Growth
16%
14%
9%
-1%
10%
10%
10%
10%
10%
10%
7,002
7,880
8,826
9,885
10,874
11,961
13,157
14,473
15,920
17,512
19,263
% of Sales
4.68%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
% of Capex
Plus/(minus)
Changes WC
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-7,273
-8,551
-10,140
-11,988
-13,881
-15,778
-16,516
-17,244
-17,952
-18,630
-19,263
-4.86%
-5.10%
-5.40%
-5.70%
-6.00%
-6.20%
-5.90%
-5.60%
-5.30%
-5.00%
-4.70%
$16,082
$18,365
$20,328
$21,453
$20,272
$21,791
$24,809
$28,214
$32,052
$36,375
$41,242
Add
Depreciation/Amort
Initial Working Capital
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
Terminal
783,592
P/E
NPV of free cash
flows
$151,751
38%
$249,677
62%
NPV of terminal value
Projected Equity
Value
$401,428
Free Cash Flow Yield
4.57%
EV/EBITDA
Free Cash
Yield
Cash/Op's
Shares Outstanding
10,611
Cash/Op's % of
Sales
Current Price
GE Stock Report - Ping.doc
Confidential
162,548
33.29
Page 33 of 34
Created by Ping-Lang Chu
3/6/2006
15.5%
19.0
5.5
5.26%
Implied equity
value/share
37.83
Upside/(Downside) to
DCF
13.6%
GE Stock Report - Ping.doc
Confidential
Page 34 of 34
Created by Ping-Lang Chu
3/6/2006