Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how General Electric fares in the ModernGraham valuation model.
GE data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary
Key Data:
| Recent Price | $25.47 |
| MG Value | $3.77 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $19.27 |
| Value Based on 0% Growth | $11.29 |
| Market Implied Growth Rate | 5.33% |
| NCAV | -$10.31 |
| PEmg | 19.17 |
| Current Ratio | 2.04 |
| PB Ratio | 1.96 |
Balance Sheet - 12/31/2013
| Current Assets | $422,303,000,000 |
| Current Liabilities | $206,572,000,000 |
| Total Debt | $221,665,000,000 |
| Total Assets | $656,560,000,000 |
| Intangible Assets | $91,958,000,000 |
| Total Liabilities | $525,994,000,000 |
| Outstanding Shares | 10,060,880,000 |
Earnings Per Share
| 2013 | $1.47 |
| 2012 | $1.39 |
| 2011 | $1.23 |
| 2010 | $1.15 |
| 2009 | $1.03 |
| 2008 | $1.78 |
| 2007 | $2.20 |
| 2006 | $1.99 |
| 2005 | $1.72 |
| 2004 | $1.59 |
| 2003 | $1.55 |
| 2002 | $1.52 |
Earnings Per Share - ModernGraham
| 2013 | $1.33 |
| 2012 | $1.28 |
| 2011 | $1.31 |
| 2010 | $1.44 |
| 2009 | $1.64 |
| 2008 | $1.91 |
Dividend History
GE Dividend data by YCharts
Conclusion:
General Electric appears suitable for either the Defensive Investor or the Enterprising Investor; however, the lack of earnings growth is a serious concern for either investor type. The Defensive Investor is disappointed in the insufficient earnings growth over the ten year historical period and the Enterprising Investor is frustrated by the lack of growth over even a five year historical period. Both investor types should keep the company on their watch lists, but should also check out other opportunities such as by reviewing 5 Undervalued Companies for the Defensive Investor and 5 Undervalued Companies for the Enterprising Investor.
From a valuation perspective, the lack of earnings growth plays a big factor. The company has seen a drop in EPSmg (normalized earnings) from $1.64 in 2009 to $1.33 for 2013. Until the earnings improve, the company's historical performance does not support the market's implied growth estimate of 5.33%. As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is below the current price, indicating the company is overvalued.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on General Electric? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in General Electric (GE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
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