General Electric (GE) stock is attractive for numerous reasons — its industrial businesses should see a cyclical rise, and GE Capital Services is in good shape financially and should become a “cash machine” in coming quarters.
GE’s valuation, using standard metrics, does not seem out of the ordinary among its peers. But GE is a curious financial-industrial hybrid, and taking it apart piece by piece yields a different conclusion, writes Morgan Stanley analyst Nigel Coe in downgrading the shares to Equal Weight.
“GE trades at 11.3x 2013 EPS, which is a slight premium to the group at 10.9x on a comparable pension accounting basis. However, when we back out GE Capital (at 1.4x tangible book value), we see that GE�s industrial business trades at a 21% premium to comps. Similarly, if we back out industrial at 10.9x, we find that GECC is at a 40% premium vs. MS Large Cap Banks.”
The company faces other headwinds — pricing competition remains intense for many energy products, and volumes could fall in the Wind business.
Coe values General Electric at $22 a share. It’s trading down 1.1% this afternoon to $19.55 a share.
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