The Best Conglomerate Stock for the Rest of 2013: Value, Yield, Upside
Feb 8th 2013 8:30AM
The markets may no longer be in a straight line higher, but 2013 is off to a great start. After taking a look at various Dow Jones Industrial Average components and after taking a look at value stocks, 24/7 Wall St. wanted to see just how the great big conglomerates are doing and what their prospects are ahead. We recently cited that Berkshire Hathaway Inc. (NYSE: BRK-A) is outperforming the stock market so far in 2013 and this leads us to ask: What is the best conglomerate for investors now that earnings season has brought their earnings and now that we have 2013 and 2014 expectations?
We reviewed Berkshire Hathaway Inc. (NYSE: BRK-A), General Electric Co. (NYSE: GE), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON) and United Technologies Corp. (NYSE: UTX) to see which conglomerates had performed the best and which had the most implied upside according to Wall St. analysts.
For a comparison, as of Friday the DJIA itself is up by 6.4% year-to-date, and the SPDR Dow Jones Industrial Average (NYSEMKT: DIA) is up 6.7% year-to-date. The S&P 500 Index is up by 5.85%, and the SPDR S&P 500 (NYSEMKT: SPY) is up right at 6% year-to-date. We have reviewed performance to date, the forward price-to-earnings ratios, the implied upside and the dividend yield of each company in evaluating our top conglomerate pick after a month into 2013.
We recently gave informal upside to our DJIA 14,590 top price target for 2013, but that has not been formally raised as of yet. For that upside to exist, the conglomerates have to perform well too. These are all screens that will be run by value investors looking for the best stocks to buy now or in the future.
Berkshire Hathaway Inc. (NYSE: BRK-A) is now at $146,260, versus a 52-week range of $116,850 to $148,562, and is up 9.1% year-to-date. Berkshire Hathaway is actually too thinly followed by analysts to give consensus price target data, and the company discourages using earnings as its real metric. These were the top stocks helping Mr. Buffett get ahead of the market so far in 2013. Team Buffett pays no dividend.
General Electric Co. (NYSE: GE) is now at $22.48, against a 52-week range of $18.02 to $23.18, and it is up by 7.1% so far in 2013. GE trades at about 13.5 times the expected 2013 earnings estimate of $1.67 per share. The Thomson Reuters consensus price target of $24.86 has risen and risen and now implies that there is upside of about 10.5% still in the stock for the next year. GE leads the dividend yields of conglomerates with a 3.4% yield on its common stock. This remains the top conglomerate by market cap at about $235 billion. GE's finance activities are improving each month, and it still has a chance to grow organically and via bolt-on acquisitions. There is also substantial value to unlock down the road via spinoffs.
Honeywell International Inc. (NYSE: HON) is priced at $70.37, and it has traded in a 52-week range of $52.21 to $70.44. Its stock is up about 10.8% so far in 2013. Honeywell trades at about 14.2 times the expected 2013 earnings estimate of $4.95 per share. The Thomson Reuters consensus price target of $74.45 implies that there is upside of 5.8% still in the stock for the next year. Honeywell's dividend yield is about 2.3% as of now. J.P. Morgan recently opined that Honeywell should reconsider additional spinoff efforts to unlock value.
3M Co. (NYSE: MMM) trades at $102.22, against a 52-week range of $81.99 to $102.99, and it is up by 10.1% so far in 2013. 3M trades at about 15 times the expected 2013 earnings estimate of $6.84 per share. The Thomson Reuters consensus price target of $106.33 implies that there is upside of 4% still in the stock for the next year, and its dividend yield is 2.3%. 3M just hiked its dividend, so its yield is in transition at the moment compared to traditional screens as the new dividend yield would be 2.48%. 3M also just instituted another $7.5 billion share buyback program against a market cap of $70 billion.
United Technologies Corp. (NYSE: UTX) trades at $89.95, against a 52-week range of $70.71 to $90.75, and it is up by 9.7% so far in 2013. United Tech trades at about 14.8 times the expected 2013 earnings estimate of $6.09 per share. The Thomson Reuters consensus price target of $96.26 implies that there is upside of 7% still in the stock for the next year, and its dividend yield is now about 2.4%. Its recent buyback approval of 60 million shares (more than $5 billion at the time) is against an $80 billion market cap.
From an outlook perspective, GE continues to be the most favorable conglomerate. It is up more than the broad market but is so far lagging its peers. That underperformance may be partly because its $200+ billion market cap is so much higher than its peers and the law of big numbers gets in the way. Another issue holding GE down is likely that it is still considered to be a bulky conglomerate that could unlock much more value with spinoffs if the market conditions will permit it ahead. With a lower forward P/E ratio, the highest dividend yield by far and above-market upside of more than 10%, GE takes the cake for the best conglomerate for investors to own for the rest of 2013.
Filed under: 24/7 Wall St. Wire, Aerospace & Defense, Banking & Finance, Buffett, Compensation, Conglomerates, Corporate Governance, Dividends & Buybacks, Earnings, Value Investing Tagged: BRK-A, DIA, GE, HON, MMM, SPY, UTX