Valuation of General Electric
Industrial companies’ performances are related to the performance of the macro economy. So you can say they’re cyclical in nature. When the economy is booming, these companies secure robust orders and execute them. Operating leverage comes into play, and their profits increase. This has a positive impact on EPS (earnings per share). Earnings are affected in a slow-growth, volatile environment.
Shares of General Electric (GE) currently trade at a PE (price-to-earnings) value of 31.4x. This isn’t cheap compared to GE’s peers and the industrial sector. The average PE multiple for industrial companies in XLI is 15.68x.
But if you compare the one-year forward earnings of GE, it’s trading at 19.1x. In comparison, 3M, Honeywell, and Illinois Tool Works are trading at 20.4x, 17.0x, and 18.4x, respectively.
GE and its peers
GE is more expensive than its peers. It enjoys specific entry barriers, a first-mover advantage, and technologies that are difficult to replicate. These give it a major competitive advantage. But for a large industrial conglomerate such as GE, premiums are justified solely on investor outlook.
Investors interested in trading in industrials can look into the iShares Morning Star Large-Cap Value ETF (JKF). Top holdings in JKF are Exxon Mobile (XOM), AT&T (T), and Wells Fargo (WFC). They make up 6.6%, 4.5%, and 4.2% of the fund, respectively.
In the next part, we’ll take a look at analyst recommendations for GE.