Has General Electric Become the Perfect Stock?
Nov 14th 2011 10:24AM
Updated Nov 14th 2011 10:50AM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if General Electric (NYS: GE) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at General Electric.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.1%||Fail|
|1-Year Revenue Growth > 12%||1.9%||Fail|
|Margins||Gross Margin > 35%||38.3%||Pass|
|Net Margin > 15%||9.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||367.7%||Fail|
|Current Ratio > 1.3||2.35||Pass|
|Opportunities||Return on Equity > 15%||11.8%||Fail|
|Valuation||Normalized P/E < 20||14.06||Pass|
|Dividends||Current Yield > 2%||3.7%||Pass|
|5-Year Dividend Growth > 10%||(10.3%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at General Electric last year, the company has managed to double its score. Improvement in its gross margins along with a big drop in valuation give GE an extra two points on the scale, but the conglomerate clearly has farther to go.
It's hard to exaggerate General Electric's reach across a wide swath of industries. Its aviation segment goes up against United Technologies (NYS: UTX) in producing aircraft engines and related equipment. Meanwhile, GE's health-care division competes with Abbott Labs (NYS: ABT) and Medtronic (NYS: MDT) with medical imaging, diagnostic, and monitoring systems. And of course, everyone's familiar with GE's home appliances, where it stands up to Whirlpool (NYS: WHR) and other rivals.
What has been GE's recent downfall, however, is its finance division. During the 2000s, the GE Capital segment became huge in comparison to its industrial businesses. That was fine as long as times were good, but when the financial crisis hit, even what had once been the largest market-cap company in the U.S. stock market suffered a near-fatal blow. Since then, the company has recovered quite a bit, but financial woes still represent a sizable obstacle among GE's challenges going forward.
But beyond its current problems, GE still looks poised to carry the world into the 22nd century and beyond. With its huge investment in non-petroleum energy production, including natural gas and wind turbines as well as solar and nuclear energy, GE appears poised to take over when Big Oil's dominance eventually gives way to alternatives.
For GE to continue its march toward perfection, it needs to keep getting back to its industrial roots. As debt levels fall with a move away from its financial business, the company should be better able to boost margins and returns on equity without finance-related gimmicks. With that plan in place, GE could well soon regain its status as a stalwart stock for the 21st century and beyond.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs and Medtronic. Motley Fool newsletter services have recommended buying shares of Abbott Labs. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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