General Electric (GE): A proxy on economic growth

"Over the past year, General Electric (NYSE: GE) has taken its lumps; however, I now suggest it may be opportune to reconsider one of America's great industrial companies once more," says Glenn Rogers.

The contributing editor to Gordon Pape's Internet Wealth Builder suggests, "General Electric is indeed a proxy for the U.S. economy. So if you believe the worst is behind us that should also be true of GE."

"General Electric is, to my mind, a great Obama infrastructures play given that it has extensive businesses in energy infrastructure and technology infrastructure. The company is also active in nuclear energy, wind and solar energy, water treatment, smart grid technology, etc. 

"Another pet Obama initiative is the modernization of the American health care system. GE has extensive assets in the health care industry and will certainly benefit from this initiative.

"The company has also applied for TARP funds to help finance a major initiative in battery technology so they will be at the forefront of the electric transportation movement.

"Unfortunately, the company also has exposure to the weak consumer spending market through their consumer electronics business, appliance business, and consumer finance business. 

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"It is exposed to the advertising business through their media and entertainment division that includes NBC Universal, CNBC, and numerous other television and cable assets. Normally, these have been a good part of the corporate asset mix but this division has been negatively impacted by the downturn in advertising dollars and will likely be soft for the rest of this year.

"But it's been GE's financial business that has caused them most of the problems these past few months. For several years, a significant amount of GE's profits were derived from the financial activities but that has not been a great place to be since a credit meltdown began in mid-2008. 

"Through that same division they had significant exposure to the commercial real estate market that has been hit extremely hard in recent months. The best that can be said is that the company is working its way through these issues and, given the current price of the stock, it is likely that most of these problems are already priced in.

"The other issue with the company is its sheer size and complexity. Some analysts have recommended that the company be broken up or significant assets sold but so far there's been no indication that major pieces of the business will be split off. There's been a lot of talk of selling the appliance division and this might happen once the overall economic environment improves. 

"But despite the negatives, the fact remains that this company has leading-edge industries in most of the important areas that are likely to help pull us out of this recession.

"Te aviation and rail divisions will be under some pressure in the mid-term since the airlines and rail companies are struggling. However, they were the world's largest manufacturers of jet engines and locomotive engines and as the airline and rail fleets begin to age GE will benefit. 

"The company is developing hybrid locomotives and fuel-efficient jet engines which will be in high demand once oil prices rebound, as they are certain to do over the next couple of years.

"Financially, the company is a behemoth with $182 billion in sales and over 300,000 employees worldwide. Last year's sales increased by just under 6% which given the environment is pretty good. 

"The price/earnings ratio is less than 10 and even with the last dividend cut the stock yields over 9%. It is very likely that GE will raise the dividend next year, assuming the economy begins to pick up.

"So what will be the catalyst that gets GE stock moving again? I believe it will be earnings, which should show improvement in the fourth quarter of this year and begin to accelerate in 2010. I think it's likely that the stock will return to a $30 price level within a year and a half.

"Investors who buy now should not experience a lot of trauma since I think that the massive sell-off in March marked a bottom that we are not likely to see again in the stock. I wish I could say that I had jumped into GE at those levels. I didn't, but I own it now and will likely buy more."