Company Analysis:
GENERAL ELECTRIC, INC
Presented to
Director of Investment Analysis
Integrity Investments
Elon, NC
Prepared by
Emily Cray
Fall 2009
October 27, 2009
INTEGRITY INVESTMENTS
--Sail into your golden years in a silver chariot
DATE:
October 27, 2009
TO:
Brad Smith, Director of Investment Analysis
FROM:
Emily Cray, Investment Intern
SUBJECT: ANALYSIS OF GENERAL ELECTRIC, INC.
I have written this report to specifically examine General Electric, Inc. as a candidate
for investment as a part of The Columbus Fund. After extensive in-depth research I’ve
concluded that investment in General Electric will benefit our company over the next five
years and beyond.
Within the report you will find information on General Electric’s history and
reputation, as well as information about its markets, industries, financial standings, other
competitors, and ethical conduct. After personally analyzing all this information, I feel very
comfortable making the recommendation of investment in General Electric.
The majority of my research is credited to online professional business databases I
used. Business Source Premier, LexisNexis, Thompson One Banker, IBIS World, and
Hoover In-Depth Reports all provided useful information for the report. I also credit Betty
Garrison, an Elon University librarian, for granting me access to the databases listed.
Reliable online publications, reports, periodicals, business analysts, and General Electric’s
website (www.ge.com) were also sources I consulted.
Nearly all of the information about General Electric was new to me. I also learned
many new and general concepts regarding finance, markets, and industries through
compiling this report. Overall, I think the information found on the online databases
proved to be the most educational during my research. After heavy research, I feel my
decision to invest will be the right one.
Should you have any questions or if you would like to discuss this report and its
recommendations, I would be pleased to do so. You can contact me through my email
(ecray@elon.edu) or by phone (913-221-9111) at your convenience. Thank you for your
confidence in me by offering the opportunity to prepare this comprehensive report. I feel
assured a decision to invest in General Electric will serve our company well.
Sincerely,
Emily Cray
Investment Intern
2
TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................ 5
PURPOSE OF THE REPORT ............................................................................................................. 5
COMPANY ANALYSIS....................................................................................................................... 5
RECOMMENDATION ........................................................................................................................ 5
INTRODUCTION............................................................................................................. 6
BACKGROUND.................................................................................................................................. 6
PROBLEM ......................................................................................................................................... 6
SOURCES AND METHODS ............................................................................................................... 6
COMPANY HISTORY ..................................................................................................... 8
ROOTS .............................................................................................................................. 8
GROWTH .......................................................................................................................................... 8
THE “WELCH ERA” ........................................................................................................................ 8
GE NOW .......................................................................................................................................... 9
JEFF IMMELT, CEO ......................................................................................................................... 9
MISSION ........................................................................................................................................ 10
MARKET ANALYSIS .................................................................................................... 11
ELECTRICAL EQUIPMENT MANUFACTURING MARKET SHARE .............................................. 11
COMPANY ADVANTAGES ............................................................................................................. 12
FIVE-YEAR COMPARISON WITH ROCKWELL AUTOMATION, INC. .......................................... 12
FINANCIAL ANALYSIS ................................................................................................ 13
REVENUES AND EARNINGS ......................................................................................................... 13
EARNINGS PER SHARE ................................................................................................................ 14
PE RATIO...................................................................................................................................... 15
ANALYSTS’ ASSESMENT ............................................................................................ 16
ETHICS: DEPENDABILITY ........................................................................................ 17
RECOMMENDATION ................................................................................................... 18
REFERENCES................................................................................................................. 19
3
LIST OF FIGURES
FIGURE 1: MARKET SHARE....................................................................................................11
FIGURE 2: GE SALES VS. ROCKWELL AUTOMATION SALES………………...………12
FIGURE 3: GE VS. ROCKWELL AUTOMATION PERCENT GROWTH………...….…12
FIGURE 4: COMPANY REVENUE VS. EARNINGS………………………………….........…13
FIGURE 4: EARNINGS PER SHARE………………………………………..………..…………..14
FIGURE 5: GE VS. S&P 500’S PE RATIO……………………………………...………………..15
4
EXECUTIVE SUMMARY
Purpose of the Report
This report was written to facilitate our company’s effort to remix The Columbus Fund’s
company list. It is our goal to ensure that the companies on this list are effective and
innovative so that our investment of one million dollars in the company’s stock will achieve
a return of at least ten percent per year over the next five years.
Company Analysis
After thoroughly researching General Electric, I’ve found the company’s reputation and
performance have continuously proved to be both innovative and affective; thus, a great
addition to The Columbus Fund. Although the company has taken a hit due to the current
economic recession, General Electric still holds its roots financially. Because of their
extensive and varied involvement in numerous and essential industries, General Electric as
a conglomerate company is expected to see positive increases in their earnings, revenues,
and earnings per share. They continue to find solutions and establish themselves as a
stable and successful company through solid and effective leadership.
Recommendation
I recommend our company’s investment of one million dollars in General Electric’s stock
because I believe the value of the investment will significantly increase after five years.
General Electric is a 117 year-old company and has grown over the years at a tremendous
rate. Currently, it is one of the biggest conglomerate companies and shows no signs of
slowing down. General Electric’s strong leadership strategies have kept the company
bracketed within the top performers of each industry it competes in; thus maximizing
revenues, earnings, and profits. As the economic recession draws to a close, General
Electric can expect to see great growth as a company in many areas. These reasons were
drawn on my research, which will be discussed more fully in this report.
Our company’s one million dollar investment in General Electric will be successful as a part
of The Columbus Fund.
5
INTRODUCTION
Background
Due to the current economic recession, Integrity Investments plans to reevaluate the set of
companies included in The Columbus Fund, looking for companies with promising,
effective practices in innovation. Fittingly, General Electric’s purpose as a company is
effective innovation, which can be seen through their immense evolution. Starting with the
light bulb, General Electric has developed many differing branches including involvement
in: transportation, finance, health care, industrial appliances, equipment, and much more.
General Electric’s effective innovations have continued to hold the company a solid leading
role as a giant conglomerate company.
Problem
Although General Electric is one of the best-diversified and well-managed companies in the
world, the recent recession has affected its financial earnings. Because General Electric
claims such a wide spectrum of industries, it can be viewed as a barometer of both the U.S.
and the world economies. The dramatic drop in price per share of GE’s stock during March
2009, demonstrates the major effects the recession had on GE. However, GE’s current stock
price has more than doubled, indicating the company’s bounce back towards success.
Sources and Methods
The majority of my research was found through online databases including Thompson One
Report, LexisNexis, Business Source Premier, and IBIS World. Through Thompson One
Report, I found lots of general information concerning company facts, financial statements
and figures. LexisNexis led me to Hoover In-Depth Reports, which greatly aided my
research on the company’s history and directors. Business Source Premier helped me find
business analysts’ perspectives about the company’s future. IBIS World was used to figure
GE’s different industries and its impact on its markets. The website of Forbes Magazine
provided an article discussed in the ethical issues section. General Electric’s Website was
helpful with information about their company and also provided me with their Annual
Financial Report.
6
Scope and Organization
You will find the following topics addressed in my report:
1. A section about GE’s history provides information about its roots and beginnings, its
growth and expansion, its leadership and development, its mission and information
about its current CEO, Jeffrey Immelt.
2. I present a market analysis examining GE’s market share within the Electrical
Equipment Manufacturing industry. I also discuss and compare competitors within
this industry as well as analyze GE’s advantages as a company.
3. I provide a financial analysis with graphic figures illustrating General Electric’s
revenues and earnings, its EPS, and its PE ratio over the past five years.
4. I take into account different business analysts’ input regarding the company’s
current condition as well as what’s in store for its future.
5. I discuss current ethical issues General Electric is dealing with.
6. After presenting all this researched information, I develop a recommendation
regarding whether or not we should invest one million dollars in General Electric.
7
COMPANY HISTORY
Roots
GE asks, “Why predict the future when you can create it?” Since their earliest days,
GE has combined research, inspiration and ambitious imagination to create tomorrow’s
reality.
Beginning in 1892, company competitors Edison General Electric and ThomsonHouston merged to form General Electric with the purpose to produce complete electrical
systems. Charles Coffin was GE’s first president while Thomas Edison flanked his side as a
director until Edison left the company in pursuit of his own innovations in 1894. Several of
Edison’s innovations are still a part of GE: lighting, transportation, industrial products,
power transmission, and medical equipment were all Edison offered by originally.
However, the company has expanded immensely, building an extremely diverse portfolio of
leading businesses in infrastructure, industrial, commercial finance, banking, healthcare,
and television broadcasting and production. (Hoover In-Depth Reports, www.ge.com)
Growth
In 1917, when the U.S. government called for a company to develop the first airplane
engine “booster” for the U.S. aviation industry, GE Aircraft Engines was born and rose to the
occasion. Thomas Edison’s experimentation with plastic filaments for light bulbs in 1893
carried through to 1930 when GE created the first GE Plastics department. By 1980,
plastics, consumer electronics, nuclear reactors, and jet engines brought GE $25 billion in
revenues. (Hoover In-Depth Reports, www.ge.com)
The “Welch Era”
Jack Welch became president in 1981 and shook up the company’s rigidity and
bureaucracy by decentralizing operations and adopting a strategy of pursuing only highachieving ventures and cutting out the rest. Within seven years, GE shed air-conditioning,
housewares, and semiconductors; and acquired Employers Reinsurance, RCA (including
NBC in 1986, but sold RCA in 1987), CGR medical equipment, and investment banker
Kidder, Peabody. (Hoover In-Depth Reports)
In 1993 GE bought mutual fund wholesaler GNA, and GE Financial Network was
born in order to sell mutual funds to the public. The company formed an NBC and
Microsoft venture - the MSNBC cable news channel in 1996. In 1997, GE Engine Services
bought aircraft engine maintenance firms UNC and Greenwich Air Services. Through ’98,
GE acquired Lockheed Martin’s medical imaging unit and Marquette Medical Systems. GE
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became the first foreign company to enter Japan’s life insurance market in 1998 and set up
GE Edison Life. By 1999, GECS bought out Montgomery Ward and in 2000 formed an ecommerce unit, Global eXchange Services (GXS). (Hoover In-Depth Reports)
The Welch Era’s biggest acquisition occurred in 2000 when GE agreed to pay $45
billion in stock for Honeywell International and to assume the $3.4 billion in Honeywell
debt. Welch stepped down when European regulators blocked the Honeywell deal later
that summer. (Hoover In-Depth Reports)
GE Now
Former president and CEO of GE Medical systems, Jeff Immelt, stepped into Welch’s
big shoes in September 2001 as CEO of GE. In 2001, GE bought commercial lender Heller
Financial for $5.3 billion. The following year GE Industrial Systems purchased electronic
security company Interlogix for $777 million. GE Healthcare Bio-Sciences was formed after
buying UK-based Amersham in 2004. (Hoover In-Depth Reports)
In 2008, GE reorganized around its four core businesses: GE Capital, GE Technology
Infrastructure (including health care, aviation, and transportation), GE Energy
Infrastructure (energy, oil and gas, and water), and NBC Universal (80% owned). Due to
unstable financial markets, GE is looking to reduce its reliance on financial services and
plans for more acquisitions in infrastructure and health care sectors. In late 2008, GE
announced its plan to shrink GE Capital and tighten lending practices. (Hoover In-Depth
Reports)
Jeff Immelt, CEO
Jeffrey Immelt joined GE in 1982 after graduating from Dartmouth College and
receiving an MBA from Harvard University. After working his way through different vice
presidential positions through various departments within the company, he became senior
vice president of GE and president and CEO of GE Medical Systems in 1996. Finally in 2000,
Mr. Immelt became GE’s president and chairman-elect and then chairman and CEO in 2001,
thus serving eight years as GE’s chairman and CEO. In 2008, Immelt’s total compensation
was $3,300,000. (Hoover In-Depth Reports)
Immelt has not been shy about making changes; in fact, he encourages managers to
innovate and take more risks. As a result, GE has been growing in new emerging areas like
biotechnology, nanotechnology, renewable energy, and digital technology. Like Welch, he
pursues growth outside the US, particularly looking at India, China, Eastern Europe, the
Middle East, and Africa. Over half of GE’s revenues are attributed to activities outside the
United States. (Hoover In-Depth Reports)
9
Mission
Often seen in conjunction with GE’s logo, the company’s motto - “Imagination at
work” - forms the backbone to GE’s overall image, essence and mission.
According to their website, “GE is imagination at work. From jet engines to power
generation, financial services to water processing, and medical imaging to media content,
GE people worldwide are dedicated to turning imaginative ideas into leading products and
services that help solve some of the world’s toughest problems.” (www.ge.com)
Their principle activity is to develop, manufacture and market a wide variety of
products for the production, transmission, distribution, control, and utilization of
electricity. Creativity, progress, research, evolution, imagination, and innovation – all are
words that come to mind when thinking of GE.
10
MARKET ANALYSIS
All over the world, General Electric competes in an extremely wide variety of
markets and industries. Their main operating segments of the company are Infrastructure,
Commercial Finance, GE Money, Healthcare, NBC Universal and Industrial. In fact, there are
over 100 SIC and NAICS codes owned by GE alone (Lexis-Nexis).
However, their three most profitable industries are:
1. Electrical Equipment Manufacturing
2. Aerospace Product and Parts Manufacturing
3. Train, Subway & Transit Car Manufacturing.
For the remainder of the report, I will be focusing on the Electrical Equipment
Manufacturing industry, as it is the most profitable.
Electrical Equipment Manufacturing Market Share
According to IBIS World Reports, GE’s market share of the Electrical Equipment Mfg
currently make up 7% of the total market, tying for second with Eaton Corporation and
behind Rockwell Automation, Incorporated (9% market share).
Major Player
Market Share Range
Rockwell Automation, Incorporated 9.0% (2009)
(IBIS World)
Eaton Corporation
7.0% (2009)
General Electric Company
7.0% (2009)
Siemens AG ADS
6.0% (2009)
ABB Limited, ADR
5.5% (2009)
Baldor Electric Company
3.2% (2009)
Schneider Electric SA
2.6% (2009)
Cooper Industries
2.2% (2009)
Other
57.5% (2009)
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Company Advantages
As a massive conglomerate company, GE’s diverse portfolio of leading businesses
drives growth and reduces cost. This financial strength and controllership allows GE to
capitalize on opportunities, which become plentiful due to the many facets each industry is
involved in. However, remaining as one company provides a set of common values,
allowing GE to face any environment with confidence. (www.ge.com)
GE’s extensive background and concentration in Research in Development has
brought many new technologies to GE’s customers. Today, GE’s Global Research consists of
more than 3,000 employees working in four state-of-the-art facilities in: Niskayuna, New
York; Bangalore, India; Shanghai, China; and Munich, Germany. General Electric’s
investment in research and development shows its desire to continue to effectively
innovate. (www.ge.com)
Five-Year Comparison with Rockwell Automation, Inc.
Rockwell Automation, Inc (RA) is a global provider of industrial automation control
and information solutions for manufactures. Its Architecture and Software segment
accounts for 42.5% of total sales and the Control Products and Solutions segment accounts
for 57.5%. As stated above, it accounts for 2% more of the market share for Electrical
Equipment Mfg than GE. (IBIS World)
Over the past five years, both GE and Rockwell’s annual sales have increased;
however, GE’s overall revenue is much larger than RA’s. This is most likely due to the
immense size and conglomeration of GE’s markets and industries. When comparing
growth in sales, Rockwell’s percent growth increased from 9.8% to 13.9% while GE’s
dropped from 13.8% to 5.8% during 2007-2008. (IBIS World)
Year
2004
2005
2006
2007
2008
GE Million Dollars Sales
$123,814
$136,262
$151,568
$172,488
$182,515
Year
2004
2005
2006
2007
2008
GE Percent Growth
N/C
10.1%
11.2%
13.8%
5.8%
RA Million Dollars Sales
$5,003.2
$4,111.5
$4,556.4
$5,003.9
$5,697.8
RA Percent Growth
25.3%
-17.8%
10.8%
9.8%
13.9%
(IBIS World)
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FINANCIAL ANALYSIS
At the end of 2008, General Electric’s assets totaled $797 billion, which was two
billion more than the previous year and recorded as the highest calculated since 2004.
(Thompson One)
Revenues and Earnings
As seen in the graph below, GE’s revenues and earnings have been relatively stable
over the past five years. Total revenues have steadily increased by $23 billion since 2004.
Company earnings have fluctuated, but stayed within a $17 billion range. This is significant
information considering our country’s most recent recession. Over 130 years, GE has
survived one depression and nine recessions; this shows the company’s financial stability
has been and probably will continue to be very secure. (Thompson One)
Highlights: Earnings in 2008 were the third highest in company history.
Revenues grew 6%, hitting a company record of $180 billion. (www.ge.com)
Revenues vs. Earnings
Dollars
(in
billions)
Year
13
Earnings Per Share
Between 2004 and 2008, GE’s EPS has also stayed relatively stable: only fluctuating
between 1.54 (in 2005) and 2.2 (in 2007).
As you can see, EPS steadily rose from 2005 to 2007, but took a dip of 0.42 in 2008.
This “dip” has been a trend across all the facts and figures I’m presenting due to the
economic recession.
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PE Ratio
GE’s PE ratio in 2008 saw a huge drop, claiming a 9.1 ratio versus 2007’s 16.85. This
is due to their huge cut of stock price per share (from $37.07 in 2007 to $16.20 in 2008).
The S&P 500’s PE ratio has done the inverse of GE’s – it has shot up. In 2007, S&P’s
ratio was 22.19; 2008, the ratio shot to 60.70. This means other companies have either
hiked their prices per share, or their EPS have significantly dropped.
PE
Year
As this graph shows, GE’s PE ratio is much lower than the S&P 500’s PE ratio,
indicating it is doing much worse in comparison to the rest of the economy. However,
taking into account the past four years, GE’s PE ratio has been relatively close to the S&P
500’s. Actually, it was calculated greater than the S&P 500’s from 2004 till 2006.
15
ANALYSTS’ ASSESMENT
I researched three major analysts reports on General Electric in order to get
professional opinions about the company’s future. The three analyst reports I read were
the analyst opinion section of finance.yahoo.com, a report by Morgan Stanly Research and
an article by J.P. Morgan.
After browsing http://finance.yahoo.com, the analyst opinion section reported the
mean recommendation of this week as 2.9, and the mean recommendation of last week as
three. This indicates to me that professional analysts are currently neutral to decide
whether or not to invest in GE’s stock. Ultimately, this is not very much help to me;
however, I view this in a positive way because although GE’s price per stock is lower than
normal, analysts do not completely reject GE’s stock creditability and possibility of growth.
The stock’s current price of $15.13 is also average between its high target of twenty dollars
and low target of ten dollars; however, its mean target is above average, reported at $16.42.
During the current month of October, seventeen research firms’ opinions about GE’s
recommendation trends are listed: six say it’s a “buy”, eight list it as a “hold”, and three list
it as a “sell”. This shows the majority of research and analysts have faith in GE’s growth
and stock capabilities.
After reading an article by Morgan Stanly Research, I learned GE’s cash earnings this
quarter is exceptional and GE is “far exceeding our model forecasts”. They also report GE
stock as “highly attractive” because of its price of approximately 16 dollars with predicted
upside trends towards 20 dollars over the next several quarters. This gives me faith the
money we invest in General Electric will definitely see at least a ten percent increase
annually over the next five years.
An article by J.P. Morgan, North America Equity Research views GE’s “extended
weakness as a buying opportunity”. GE’s net was better than the firm’s expectation due to
their mixed geography. They report the ultimate analysis of GE’s quarter looking “okay at
face value” but is complicated due to uncertainty concerning taxes. Regardless of this lack
of clarity, they recommend investing in GE’s stock given GE shares continue to trade below
what they view as fair value. Most importantly, GECS equity increased in 3Q, which is
strong evidence that a large capital raise is unlikely and that longer-term value won’t be
destroyed by the current credit cycle. They foresee further signs of stabilization in future
quarters and recommend investors appreciate GE’s earnings potential.
The majority of my findings reported the prospect of General Electric’s
improvement in the stock market would steadily increase over a long period of time.
Currently, GE’s price per share is waffling within an average price range and will most
likely do so for a long period of time, but ultimately gradually increase along with the
economy to return as a reliable stock giant.
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ETHICS: DEPENDABILITY
GE has seen a lot of fluctuation regarding its dependability as a company. As of
2008, the following are positive progress for GE:






BusinessWeek magazine ranked GE as the #4 Most Valuable Brand in the world
GE is ranked #5 in the Fortune 500
S&P 500
Dow Jones Industrials
Dow Jones Global Titans
Ranked #23 in FT Global 500
(www.ge.com)
However, four alleged accounting violations dating back to 2002 found by the SEC
have resulted in GE agreeing to pay a $50 million fine to the commission and $200 million
in legal fees. These accounting manipulations have severely tarnished the company’s
reputation and helped to set the stage for last year’s collapse in its stock price. GE has
prolonged a nearly decade-long record of either meeting or exceeding in transactions,
looking a lot like loans and messing with the accounting for interest-rate hedges.
(www.forbes.com)
Words like “fraud” and “materially false statements” load the charges and reflect the
SEC’s efforts to regulate financials. All of the inflated earnings were erased in previous
restatements and GE settled with the SEC’s charges all the while avoiding to admit or deny
guilt. The SEC agreed to drop all pending investigations against GE and now the company
has about $17 billion in commercial paper outstanding under a taxpayer-guaranteed
program to help stabilize its financial firms. (www.forbes.com)
Although these accounting violations have taken a toll on GE’s reputation, I believe
the company will move past these issues and easily reclaim their role as a trusted company
and American icon.
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RECOMMENDATION
After reviewing all the information I’ve presented above, I feel that Integrity
Investments should go through with investing in General Electric, Inc. This is because I
strongly believe the company’s stock will see a ten percent annual growth rate every year
over the next five years, ultimately making our original investment of one million dollars
grow to 1,610,510 dollars.
The company’s history of successful growth and expansion, its tradition of strong
leadership and strategy, its involvement and dominance in many diversified industries and
markets, and its ability to stay afloat even during difficult economic times lead me to
believe this company’s stock has no where to go but up.
Currently, GE’s price of stock is $15.13. Our budget of one million dollars would
allow us to buy 66,093 shares of stock. I predict the stock price will increase by at least ten
percent each year. At the end of five years, the future stock price will be about $22.14. By
using the compounded interest formula, $22.14 multiplied by our number of shares of
stock (66,093), our company would turn a profit by investing in General Electric.
(http://finance.yahoo.com)
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REFERENCES
33531 - Electrical Equipment Manufacturing in the US - Industry Report. (n.d.). Retrieved
October 14, 2009, from IBIS World.
Accounting Tricks Catch Up With GE - Forbes.com. (n.d.). Retrieved October 16, 2009, from
http://www.forbes.com/2009/08/04/ge-immelt-sec-earnings-business-beltwayge.html
Electrical Equipment Manufacturing in the US - Industry Report. (n.d.). Retrieved October 14,
2009, from IBIS World.
GE: Analyst Opinion for GEN ELECTRIC CO - Yahoo! Finance. (n.d.). Retrieved October 20,
2009, from http://finance.yahoo.com/q/ao?s=GE
GE History: Heritage, Legacy, Thomas Edison, Light Bulb. (n.d.). Retrieved October 27,
2009, from http://www.ge.com/company/history/index.html
GE Past Leaders: John F. Welch Jr., Biography. (n.d.). Retrieved October 12, 2009, from
http://www.ge.com/company/history/bios/john_welch.html
GE: Summary for GEN ELECTRIC CO - Yahoo! Finance. (n.d.). Retrieved October 17, 2009,
from http://finance.yahoo.com/q?s=ge
General Electric Cash Build is the Highlight: Debate Shifting to Bulls Corner. (2009). Morgan
Stanley Research, 1-22. Retrieved October 16, 2009.
General Electric Co: Snapshot. (n.d.). Retrieved October 14, 2009, from LexisNexis.
General Electric Company - Company Report US. (n.d.). Retrieved October 12, 2009, from
IBIS World.
Home Page. (n.d.). Retrieved October 12, 2009, from http://www.ge.com/index.html
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Hoover's Company Records: In-Depth Reports. (n.d.). General Electric Company. Retrieved
October 14, 2009, from LexisNexis.
J.P. Morgan, North America Equity Research. (2009). General Electric Co. Dust Settles in 3Q:
Raising Estimates, 1-20. Retrieved October 20, 2009, from Thompson One Banker.
Thompson Financial Full Company Report. (n.d.). Retrieved October 14, 2009, from
Thompson One Banker.
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