COMPANY DESCRIPTION
GE
is a diversified industrial and financial
services company. Industrial operations include
aircraft engines, appliances, broadcasting,
power systems, security products, and medical
equipment.
GE
Capital has interests in real estate lending,
retailer financing, asset management, and
consumer lending, among others.
CEO
Jeff Immelt hosted GE's 2008 outlook meeting
in NYC in early December 2007. GE reiterated
its '07 EPS guidance of $2.19-$2.21 and 4Q07
of $0.67-$0.69, and established '08 EPS guidance
of $2.42 or higher, reflecting 10% EPS growth.
Bottom
Line: Infrastructure and Commercial
Finance remain the core drivers, risk to Healthcare
(DRA, timing of OEC), NBCU (writers’
strike), and GE Money (U.S. Consumer) are
hedged. One other concern lies in the rising
tax rate. GE’s tax rate even at a higher
tax rate remains in the low 20%s, which continues
on the low end and in the future has the potential
to expand.
Financial
Services:
GE’s immense financial strength and
Triple-A credit rating could allow the company
to take advantage of attractive investment
opportunities in a depressed market when credit
is difficult for others to obtain.
Financial
services earnings are expected to grow 5%
in 2008, with GE Money earnings flattish,
and Commercial Finance up 5-10%. GE Money
earnings are scheduled for redeployment to
Commercial Finance.
The
reason for this is the relative attractiveness
of consumer credit markets vs. asset-backed
commercial credits.
GE’s
AAA balance sheet allows a lower cost of funding,
a clear competitive advantage, with underwriting
opportunities suggesting 25-30% ROE opportunities,
vs. 15-20% historically.
The
segment has a well diversified, global portfolio.
Out of some $300 billion in total assets,
about 40% are outside the U.S.
GE
has no exposure to structured investment vehicles
(SIV) or collateralized debt obligations (CDO).
Results
for GE Money, the consumer finance unit, are
expected to be flat with 2007. Helping offset
U.S. weakness, GE Money benefits from a portfolio
that is more than three quarters outside the
U.S.
The
company may reduce its exposure further with
the sale of some selected assets.
Commercial
Finance Assets have about a 2.5-3.0 year life
on average, thus the profitability of the
portfolio will be replaced by higher return
assets at the rate of about one third of the
portfolio per year, according to plan. Given
this, Commercial Finance earnings growth guidance
appears conservative, and actually, this was
underscored by CEO Jeff Immelt as an area
for potential upside to guidance.
The
Commercial Finance portfolio is about 50%
global, while the consumer portfolio is only
about 23% U.S.
GE
is also considering strategic moves within
the Financial Services portfolio, including
an exit or partnering of the private label
credit card business in order to attain greater
scale and leverage base costs.
Healthcare:
2008 guidance for 5-7% revenue growth and
10% segment profit growth looks reasonable
given the return of OEC.
OEC
sales are expected to come back on line in
1Q08, vs. previous expectations for 4Q07,
raising concerns that this remains a moving
target.
Healthcare
revenues are now about 50% global. The segment’s
growing international footprint could help
overcome domestic sluggishness.
Double-digit
operating income growth is projected for 2008
following declining earnings in 2007, and
Healthcare could be a positive factor for
the year should this prove conservative.
NBC
Universal: Revenue guidance
of ~$18 billion implies about 20% growth,
but excluding the Olympics in ’08, underlying
growth guidance was 5-10%, with 10% profit
growth.
In
2008, NBCU looks back at two years of relatively
easy comparisons, especially from a profit
perspective, lending support to the outlook.
A drawn out writers’ strike could have
a negative impact on revenue here.
Industrial:
2008 guidance for 5-10% revenue growth and
10% operating profit growth is based on GE’s
positive outlook for further globalization
and new products designed around environmentally
favorable appliances and lighting. ’07
and ’08 restructuring initiatives.
Energy
is expected to benefit from more large turbines
sold, growth in wind, and rising high-margin
service revenue.
In
Aviation, commercial engine deliveries could
remain strong with services growing and acquisitions
adding to the total. International demand
for locomotives has resulted in rising orders
and backlog at GE Rail.
Oil and Gas and Water are expected to perform
well next year.
In
all, segment revenue could exceed $65 billion
in 2008, or over 35% of GE’s projected
revenue, with operating profit up 15% to 20%
to over $12 billion, in our estimation.
International
revenue could be increase in 2008 due to the
company’s presence in emerging markets
such as China, India, Russia, and the Middle
East.
Service
revenue, which typically has higher margins
than equipment sales, is forecast to grow
at a double-digit rate.
GE
may make use of its financial strength to
pursue opportunistic acquisitions complementary
to its business units.
Summary
In
summary, strong Infrastructure results in
2008, along with continued growth in other
key areas, should more than overcome weakness
in the domestic financial markets, allowing
GE to post double-digit EPS growth for next
year
It
is possible that company management is being
conservative in its 2008 outlook, which is
prudent in an uncertain economic environment
in the U.S. However, swing factors such as
the performance of GE Money or the strength
of the rebound in healthcare provide the potential
for better than management expected and stated
results.
Outlook and Conclusion
GE plans to commit a large amount of cash
to benefit shareholders. The company’s
Board of Directors approved an 11% increase
in the quarterly dividend to $0.31 per share
from $0.28 per share previously, its 32nd
consecutive annual increase. The annual rate
of $1.24 per share provides investors with
a 3.3% yield based on the closing price on
this report. In addition, the Board authorized
a new share repurchase plan amounting to $15
billion over the next three years.
Risk
Key
risks to price target include portfolio execution
risk, the overall health of the GE Capital
balance sheet, a general downturn in the industrial
economy, an inability to offset higher input
costs, credit risk spreading to Alt-A loans
and credit cards, and potentially lower margins
on equipment sales in favor of longterm customer
service agreements (CSAs).
