GE and the Uber Bank Forensic Analysis
This is the follow up to the preview of our analysis of GE. A PDF version is here: GE_ResearchReport_04July2008 (163.44 kB 2008-07-09 13:50:44). These are drafts and haven't received a final review, but I am releasing them anyway. Enjoy!
General Electric (GE), the largest conglomerate in the world, has significant operations in the industrial and financing sectors. Considering the ongoing credit turmoil and the worsening macro economic scenario, GE remains exposed to significant risk considering its exposure to the real estate and consumer finance business. However, the stock price has corrected significantly, declining 35% since the announcement of the 1Q 08 results. GE missed its 1Q 08 guidance significantly due to problems with the Commercial Finance and GE Money segments. GE has a significant exposure of US$87 billion toward the real estate market; higher write down's are expected in the coming quarters. Moreover, GE Money is expected to witness higher losses on account of the rise in defaults in its mortgage and credit card portfolio. GE's higher loss provisions, going forward, and rising inflation will impact the company's profitability. GE also plans to sell its appliance business due to a decline in profitability and weakening demand. In addition, GE intends to spin-off its Private Label Credit Card business as the company aims to reduce its consumer finance operations. This sell-off would result in dilution of EPS in the coming quarters. However, we believe the Infrastructure segment would continue to report healthy performance, going forward, driving the growth of the industrial business. The growth in the industrial business is expected to help GE offset the decline in its financing business.
Key Investment Points
GE's real estate exposure warrants significant write-down's in the coming quarters
GE's Commercial Finance segment has real estate assets totaling US$87 billion comprising a mix of physical real estate and financing to third party investors. This segment has approximately US$40 billion of real estate financing receivables as of December 2007. GE Capital Services (GECS) includes Commercial Finance, GE Money, and the aviation and energy financing businesses of GE Infrastructure. GECS accounts for approximately US$40 billion of GE's investments in real estate. Real estate investments consist of real estate held for investment and equity method investments. Investments in real estate consist of a range of properties with office buildings accounting for 49%; apartment buildings, 14%; industrial properties, 11%; retail facilities, 9%; franchise properties, 7%; parking facilities, 2%; and other, 8%. Geographically, the Americas account for 48% of these investments followed by Europe and Asia with shares of 33% and 19%, respectively.
GE aims to decrease volatility in its real estate earnings by reducing its dependence on the equity portfolio due to more lumpy and volatile returns and move toward a steady stream of income from third party financing. The ongoing turmoil in real estate markets and continuous decline in housing prices due to falling demand and rising foreclosures makes it difficult for GE to execute real estate deals. Moreover, the macroeconomic headwind, credit turmoil, and lack of liquidity in the markets are expected to restrict the number of transactions in real estate markets. As witnessed in 1Q 08, tough market conditions resulted in a decline in real estate transactions. GE sold 56 properties for US$1.7 billion in 1Q 08 and added assets totaling US$7 billion. Of this, senior secured debt accounted for approximately 85%, in line with the company's aim to change its real estate portfolio mix. However, the decline in potential buyers resulting in a fall in prices and consequently gains would lead to lower earnings.
The company's non-earning receivables (NPAs - 90 days past due) in real estate are 0.38% of its outstanding receivables. However, 30-day delinquencies are 0.36%, down four basis points compared to last year. In the Commercial Finance segment, delinquency rates increased to 1.36% in March 2008 from 1.26% in March 2007. The continuing liquidity crunch, rise in borrowings cost, and worsening macroeconomic conditions can lead to increased delinquencies. This in turn would cause higher writedowns on the real estate portfolio. In the Commercial Finance segment, real estate contributed 22% to total revenues; this segment registered a 16% decline in profits in 1Q 08 due to difficult market conditions. Revenues from the Commercial Finance segments increased 7%. However, profits fell 20% due to the decline in asset sales, higher mark-to-market losses, and impairments. Going forward, with worsening macroeconomic conditions and the housing slump showing no signs of recovery, the Commercial Finance segment could witness higher writedowns and mark-to-market losses.
Source: Company data
Rising defaults in revolving and installment credit could result in higher NPAs in GE Money segment
GECS, the financing business unit of GE, derives 35% of its top line from GE Money, a leading provider of credit and banking services to consumers, retailers, and auto dealers worldwide. GE Money has approximately US$175 billion of financing receivables, of which approximately 42% (US$74 billion) is toward non-US residential mortgages; US$34 billion, non-US installment and revolving credit; and US$30 billion, US installment and revolving credit. Of GE Money's non-US mortgages worth US$74 billion, 26% (i.e., US$19 billion) accounted for introductory, below market rates scheduled to adjust at future dates with a high loan to value (LTV). These mortgages are likely to face pressure and witness higher defaults in the coming quarters as rising inflation would result in interest rate hikes in the near future. Moreover, these adjustable rate mortgages with high LTVs would not be able to bear the pressure of higher interest rates, leading to an increase in defaults.
GE has significant exposure of approximately US$28 billion to the UK mortgage market. Considering the rising writedowns and difficulties faced by UK local banks, conditions appear worrisome. Moreover, the decline/correction in housing prices in the UK is expected to erode GE's mortgage portfolio despite GE's claims to have insurance coverage for LTV greater than 80% and its exposure of less than 5% to buy-to-let mortgages. GE witnessed higher delinquencies of 14% in the UK market. Based on these factors, defaults are likely to rise in GE's non-US mortgage portfolio.
GE Money also has significant exposure to consumer finance. Revolving and installment credit facilities are likely to witness higher defaults amid a deteriorating global macroeconomic scenario. GE Money has approximately US$63 million in revolving and installment credit (both US and non-US). The global rise in inflation is threatening to erode consumer purchasing power and decelerate economic growth. This in turn is expected to result in higher defaults in the coming future. The delinquency rate in the GE Money segment increased to 5.64% in March 2008 as compared to 5.22% in March 2007. The rise was primarily driven by GE Money's US business, where the rate increased to 5.75% from 4.72% in March 2007. GE anticipates a 20% decline in profits in 2Q 08 considering the difficult market conditions in the US.
Revenues and operating profits of GE Money
Source: Company data
Provision for losses to rise as increased strain in financing business would impact GE's bottom line
GECS' current provisions for losses stands at 1.3% (1Q 08 annualized) of total financing assets, up from 1.0% in 2006. GE Money accounted for a majority of the provisions due to deterioration in the credit card and mortgage businesses. Loss provisions for GE Money and the Commercial Finance segment were 0.28% and 2.29% in 4Q 07, respectively. However, we believe the Commercial Finance business would also witness higher loss provisions in the coming quarters as it has high real estate exposure.
As the consumer finance delinquency cycle is still in its early stage, we anticipate provisions for losses to continue its upward trend. The continued recession in the US housing market and rising delinquencies in most of GE's financing businesses would necessitate higher loss provisions in the future. Moreover, as the strain in the housing market spreads to other consumer finance segments, defaults are poised to rise. Consider the historical highs of loss provisions in a recessionary market as we are currently in, loss provisions could touch 2% of financing assets as witnessed during the recession in the 1990s. GECS' financing assets increased at a CAGR of 11.7% to US$385 billion in the last four years. The financing assets have further increased to US$418 billion.
Financing receivables and loss provisions as a percentage of financing receivables
Source: Company data
Investment portfolio has significant exposure to the subprime asset category
GE had investment securities totaling US$45.2 billion as on March 31, 2008, compared to US$45.1 billion as of December 31, 2007. The company held residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) worth US$5.8 billion and US$2.8 billion, respectively, in 1Q 08. The RMBS and CMBS portfolios include unrealized losses of US$0.6 billion and US$0.2 billion, respectively. In its RMBS portfolio, GE's exposure toward subprime assets is approximately US$1.8 billion. The bond insurers or monolines have provided credit enhancements and insured investment securities totaling US$3.5 billion, including US$1.4 billion of subprime assets. However, with downgrades in the credit ratings of monolines, insurance provided by them has little value as they are on the brink of bankruptcy. Consequently, GE would be required to write-off its exposure towards the subprime sector and monoline insurance would be of little help.
Sluggishness in the US economy could negatively impact the prospects of Healthcare and Industrial businesses
The US economy currently faces the twin problem of rising inflation and threat of an economic slowdown. The banking and financial services sector reported writedowns and credit losses of about US$400 billion due to the decline in US residential and commercial real estate markets. In addition, the unemployment rate surged to 5.5% in May 2008, the largest monthly rise in more than two decades, confirming the recessionary situation in the US. The increase in unemployment rate signifies lower consumer spending power and consequently lower demand. The sluggishness in consumer spending is expected to hamper corporate profits, going forward.
The rise in inflation attributable to higher crude and food prices is negatively impacting the US economy. Recently, crude oil touched a record high of US$145 per barrel, warranting a hike in interest rates. Although the US Federal Reserve maintained interest rates in its last meeting, it expressed concerns about rising inflation in the economy. The 25 basis point rate hike by the European Central Bank (ECB) on July 03, 2008 is also likely to exert pressure on the US dollar and lead to further depreciation of the USD. The Federal Reserve is thus likely to hike interest rates in the near future to combat inflation and a falling dollar. The deteriorating macroeconomic scenario in the US is likely to negatively impact GE's Industrial and Healthcare businesses in the coming quarters. Moreover, the Industrial business is expected to be significantly impacted by the decline in consumer spending.
GE's Healthcare business has exhibited poor performance in the recent quarters. Net revenues reduced in 1Q 08 and growth in total orders remained almost flat at around 1% for the last three quarters. Operating profit declined significantly in the previous quarter (down to US$528 million in 1Q 08 from US$1,113 million). Moreover, GE's performance in the US market was weaker than expected (American Diagnostic Imaging orders were down 13%). Severe competition in the US market for diagnostic imaging and clinical business systems also contributed to the decline in growth. To make matters worse, one of GE's healthcare plants was shut down for 20 months by the FDA. In addition, GE Healthcare's drug discovery business is expected to face intense competition from makers of generic drugs as the patents are expiring for many major drugs. Due to the worsening credit situation, hospitals would continue to face pressure in terms of funding and capital expenditures. This trend is evident in the fall in community hospital orders for GE's products by 18% in March 2008. Consequently, we believe the Healthcare business would face pressure in the coming quarters.
Healthcare segment - revenues and operating profit
Source: Company data
Sale of Appliance and Private Label Credit Card (PLCC) business to dilute earnings
GE plans to divest its Consumer & Industrial business in the face of tough market conditions, which are translating into lower returns. The company is exploring multiple strategic alternatives such as the sale or spin-off of its entire Consumer & Industrial (including Lighting & Industrial) segment as well as the potential sale of individual parts. The weakness in US residential markets has weighed heavily on returns from the Appliance business. GE's Appliance business reported revenues of US$7.2 billion and EBIT of US$0.7 billion in 2007. The likely sell-off of this unit would result in EPS dilution of about US$0.06 cents.
In addition, considering the difficult market conditions in the consumer finance segment as well as rising delinquencies and defaults, GE plans to sell its PLCC business. This would further dilute EPS in the coming quarters as PLCC moves into discontinued operations.
Industrial business - Revenues and operating profits
Source: Company data
Rising inflation and higher input costs coupled with slackening demand to exert pressure on operating margins
Globally, inflation has risen significantly in the last few months, resulting in increased pressure on the company's operating profits. Most of the segments are facing higher raw material costs as crude oil continued with its unprecedented rise. Oil prices almost trebled from US$55 per barrel in 2005 to US$144 in July 2008. The surge in commodity prices has significantly affected GE's operating margins. In addition to oil prices, other commodity prices have been rising steadily in the recent past. This is evident from the Reuters Commodity Research Bureau (CRB) commodity index, which has been rising continuously since 2005. The index has climbed from a value of 284.75 in January 2005 to 541.30 in May 2008. The Reuters CRB Index is a major commodity index including metals (copper, lead, steel), foodstuffs, industrial and other major commodities. The company's operating margins slid 15.76% in 1Q 08 from 19.9% in 4Q 07. This decline was due to increasing expenses, a major portion of which is the rise in input raw materials costs.
Record food and energy prices have pushed inflation in Europe to 4%, twice the 2% limit set by European Central Bank (ECB). Producer prices jumped a record 7.1% in May 2008 in Europe from a year earlier as oil prices doubled over the same period.
GE Infrastructure has been grappling with high raw material costs. The rise in prices of commodities such as copper, steel, and gold majorly contributed to the fall in this segment's margins. Consequently, GE increased prices of many of its products. Due to the unprecedented rise in prices of raw materials, GE sold its plastic division. Furthermore, GE Energy depends on natural gas and other hydrocarbon raw materials, the prices of which have soared in recent months. High prices of nickel, stainless steel, and concrete have increased construction costs for GE Energy's nuclear plants. GE was thus compelled to increase the price per kilowatt of capacity of nuclear plants to US$2000-3000. In addition, GE Energy's coal plants are also facing the pressure of increasing raw material prices. The price of coal fired power plants have recently risen by 25-30%. Moreover, the price hike of raw materials has not spared GE Infrastructure Water and Process Technologies. This unit is facing the heat of inflation as prices of main raw materials including specific chemicals, membranes, and other purifying equipment have climbed between 5% and 10%. Although GE can pass on the rise in costs to end users temporarily, the company would not be able to continue doing so for a long time and will ultimately have to bear the pressure of rising prices. The decline in operating margins seen in 1Q 08 can be expected to continue for a few more quarters unless global commodity prices cool off. GE Infrastructure and GE Energy are expected to take the biggest hit by the rise in prices.
Source: Company data
Strong Infrastructure business to offset decline in Financing business
GE's Infrastructure business could offset the decline in revenues and profitability of the financing business. The infrastructure business recorded strong growth in 1Q 08. The healthy growth in the company's Aviation, Energy, and Oil & Gas businesses supported the gain in the infrastructure segment. The strong order book of the Energy segment as well as oil & gas business is likely to drive growth in the coming future. Revenues from Energy increased 28.4% y-o-y due to strong demand. The strong order backlog in most of its sub-segments—Aviation, Energy, and Oil & Gas—would contribute to growth in the infrastructure business. We expect the Infrastructure segment to mainly drive the bulk of the industrial business as witnessed in 1Q 08. Other units of the Industrial business, such as Healthcare and Consumer & Industrial, are likely to face pressure, going forward. In addition, the NBC Universal business is likely to support growth of the Industrial unit. Thus, growth in the Industrial business unit could help GE offset its losses from the financing business. However, as economic problems further intensify, the ability of GE's Industrial unit to bail out the financing segment would be tested in the future.
Infrastructure segment - Revenues and operating profit
Source: Company data
Key assumptions - GECS
Financing receivables growth in Commercial Finance segment
In the Commercial Finance segment, growth in financing receivables is likely to take a hit, primarily in the real estate sector. GECS is expected to reduce its exposure toward the real estate sector as the tough market conditions and continued decline in housing prices would impact real estate asset values. The growth in Equipment and Commercial and Industrial segments is likely to offset the decline in the real estate sector. Financing receivables in the Commercial Finance segment grew 17% and 22% in FY 2006 and FY 2007, respectively. Furthermore, financing receivables gained 15% in 1Q 08. However, as macroeconomic conditions continue to deteriorate, growth in these divisions would be negatively affected in the coming quarters. Moreover, in light of the US recession and tough global operating environment, loan growth is set to decline, going forward.
Financing receivables growth in GE Money segment
GE Money has exposure towards non-US mortgages, credit cards, and other consumer loans (installment and revolving credit) both in the US and outside. The last few years of strong credit expansion has seen GE Money's financing receivables witness significant growth. Although GE Money has a diversified loan exposure strategy, the company is focusing on reducing its exposure to consumer loans in light of rising defaults. GE is looking to divest its consumer finance business, including its PLCC business. In the event of a sale, the company would lower its financing receivables in the coming quarters. The rising defaults witnessed across banking products in not only mortgages but also credit cards, auto loans, and student loans would restrict loan growth. GECS is expected to adopt stricter lending standards due to increasing defaults and tighter credit markets. This in turn would translate into lower loan growth. Taking a cue from the collapse of the US mortgage market, GE is likely to reduce its exposure to non-US mortgages. In fact, the bank's UK mortgage portfolio is presently under the scanner as the defaults in the UK markets are beginning to rise. The correction in housing prices correction is expected globally and, consequently, would restrict mortgage lending activities in the near future. Growth in installment and revolving credit (credit cards and consumer loans) is also anticipated to decline as defaults rise and the unemployment increases.
Loan growth in Infrastructure business
Loans in the Infrastructure segment are likely to contract in the coming quarters with tight credit market conditions and the slowing global economy. Loans are generally provided for the aviation and oil & gas units in the Infrastructure business. However, difficulties in the aviation business are expected to restrict loan growth. However, the rise in exploration and related activities due to the surge in crude oil prices would increase loans disbursed to this sector.
Short term borrowings could be affected by loss of confidence among financial firms
There have been concerns in the market over GE Capital facing funding issues related to refinancing its short term borrowings. In 1Q 08, GECS' borrowings stood at US$537 billion, with short term borrowings of US$199 billion and long term borrowings of US$338 billion. Moreover, GE has already raised US$35 billion as long term debt in 1Q 08. However, the bigger challenge for GE would be to continuously refinance its short term borrowings as credit conditions continue to worsen. The loss of confidence among financial firms would make it difficult for GE to raise funds.
In light of the low interest rate scenario in the US, GECS may increase its borrowings in the future. However, the US Federal Reserve is likely to increase interest rates in the near future to combat rising inflation. This is likely to increase the borrowing cost of GE in the near future. Moreover, the worsening macroeconomic conditions and decline in loan growth and credit expansion would also hamper borrowing activities. Consequently, we anticipate borrowings to slow down toward the end of 2008.
Provision for losses on financing receivable assets
Provisions for losses on financing receivables are likely to increase in the coming quarters considering GECS's portfolio. The company has significant exposure toward real estate, credit cards, and consumers loans which are witnessing rising defaults. GE Money accounts for a majority of the provisions as mortgages, credit card receivables, and consumer loans have higher defaults. Moreover, GE Money is exposed to the UK mortgage market, which is witnessing high delinquencies. In addition, defaults in the credit card and consumer finance businesses in the US are likely to drive loss provisions. The annualized loss provisions of 1.3% in 1Q 08 is likely to increase, going forward, and reach a high of 1.78% in FY 2008. In addition, the Commercial Finance segment, which has significant exposure toward real estate assets, is likely to witness higher writedowns and provisions in the coming quarters. The increase in provisions for losses would negatively impact GE's bottom line. Loss provisions of GE Money and the Commercial Finance segment are anticipated to increase 3.6% and 0.46% in 2009, respectively, as the default cycle starts to peak in the coming quarters.
|Provisions for losses on financing receivables|
|Total provisions for losses
on financing receivables
|Gross write-offs as a % of financing receivables|
|Total financing receivables||1.45%||1.70%||1.60%|
Write-offs to rise on account of GECS' exposure towards mortgages and credit cards
Due to GE Money's significant exposure towards the mortgage market in the UK as well as credit cards and consumer finance, write-offs are expected to increase, going forward. Although GE has an international exposure with loans and financing receivables spread across the globe, global inflation and consequently increased interest burden would see rising defaults. GE also has significant exposure towards US markets, which is leading the default cycle globally. GE's UK mortgage business is already under pressure as the delinquency rate is rising in the country.
Write-offs increased from US$997 million in 4Q 07 to US$1,335 million in 1Q 08. Moreover, rising delinquencies across asset classes would result in higher write-offs in the coming quarters. GE's exposure to the real estate market totals US$87 billion GE Money is looking at spinning off its PLCC business, where defaults would be significantly higher in the near future.
Key assumptions - GE Industrial
GE Aviation sector to witness sluggish growth in the coming quarters
The aviation unit has been the only laggard for GE in the infrastructure segment in 1Q 08. Growth in this unit was primarily driven by revenues from commercial engines and sale of equipment (increase of around 90% and 50% in Q4 07 and Q1 08, respectively). The service business has not been faring well in the Aviation segment. Looking at GE's order book, the outlook for the aviation is not promising. The aviation sector's order book has stagnated (US$5.5 billion, US$6 billion, and US$5.5 billion in the last three quarters).
Concern for national security after the twin tower attack has increased the demand for military aerospace equipment. Military engine orders grew 50%, while commercial engine orders declined by about the same percentage in 1Q 08. The aviation industry is saturated as the segment's major customers, namely, Airbus and Boeing, have not announced any major expansion plans until 2012. Boeing 787s and Airbus deliveries are expected to level off in the near future according to GE officials. Consequently, revenue growth in the aviation sector is likely to remain restricted in the coming quarters.
Globally, the aviation sector is witnessing a challenging operating environment. More than 20 airlines have gone bankrupt in the last six months. In addition, most of the airlines are in the cost-cutting mode (United Airlines has already announced plans of laying off 14% of its workforce over the next 18 months and ground 100 aircraft). This would translate into lower orders for the GE Aviation business. Furthermore, the International Air Transport Association (IATA) has lowered its forecast on the aviation industry on account of rising crude prices. Oil prices have risen from US$73 per barrel in 2007 to US$144 currently.
Operating profit margins of the aviation segment declined to 17.9% in 1Q 08 as compared to 21.5% in 1Q 07. Rising raw material costs driven by surging oil and commodity prices are negatively affecting operating margins. Operating margins have been low (around 17%) compared to above 20% in 2006. Going forward, pressure on top line growth as new orders stagnate and raw material cost rises would negatively impact the aviation sector's performance.
GE Energy to drive growth in Infrastructure business
The energy segment has been the main growth driver for the GE Industrial business with operating margins rising 2.1 percentage points y-o-y to 16.1% in 1Q 08. Revenues from GE's energy sector have risen steadily in the recent quarters, boosted by thermal (up 33%) and wind energy (gain of 22%). Total orders of US$4.8 billion were up 30% in 1Q 08. Energy revenues rose 21% and profits were up 32% y-o-y in the same quarter. Operating profit stood at US$907 million with operating margin of around 16% in 1Q 08. The outlook remains positive for the sector as energy requirements for US are forecasted to increase.
The Energy Information Administration (EIA) projects the prices of petroleum, natural gas, and electric renewable energy to rise by 10%, 5%, and 25% by 2020, respectively. The increasing demand-supply gap for energy, more stringent environment regulations against carbon fuels, and difficulty in setting up sites for nuclear plants would drive the demand for wind and gas turbines in the future. The EIA has projected primary energy consumption to grow by 0.7% from 2006 to 2030. The EIA also forecast rapid growth in renewable energy production as a result of the EISA 2007 RFS and various state mandates for renewable electricity generation. The strong order book and healthy demand in the near future is anticipated to drive revenues from the energy sector. This sector has a healthy order book, with major equipment growing around 50% in the last two quarters.
GE Infrastructure segment to drive growth in GE Industrial business
The infrastructure segment has been the major contributor to growth of the GE Industrial business in the last few quarters. The infrastructure segment's revenues increased 23% to US$14,960 million in 1Q 08, and operating profit grew 17% to US$2,588 million. Revenues were mainly driven by thermal (+33%) and wind (+22%) in the energy segment; commercial engines (+10%) and military (+18%) in the aviation segment; and locomotive service revenues (+9%) in the transportation segment. Moreover, strong backlogs (around 100% growth in thermal and nuclear; 80% growth in aviation) would help the infrastructure segment sustain growth in the coming quarters. In addition, the oil & gas business has witnessed strong growth in its order book due to increased exploratory and related activities. The infrastructure segment is anticipated to grow, driven by the energy and oil & gas businesses, going forward.
Slack demand in GE Healthcare segment
GE Healthcare's business is anticipated to face pressure in the coming quarters due to a decline in orders of diagnostic imaging and clinical business systems. Severe competition continues to exist in the US market for diagnostic imaging and clinical business systems. Furthermore, increased competition in the generic drug sector and lower demand from hospitals would translate into lower sales, going forward. Community hospital orders fell 18% in 1Q 08 due to a decline in funding opportunities. Consequently, we expect growth in the Healthcare segment to be sluggish going forward.
Sell-off of Appliance business and weak US economy to drag GE Industrial segment's performance
GE has decided to spin off its Appliance business due to a reduction in demand with the decline in the US residential market. Moreover, the operating environment has been very difficult characterized by thin margins. GE is reportedly looking to divest its entire Consumer & Industrial business in light of the tough operating environment. Consequently, the sell-off the appliance business would hamper the Industrial segment's performance.
To value GE, we carried out a sum of parts valuation and valued the conglomerate's Financing and Industrial business. We valued each business separately using the Discounted Cash Flow (DCF) analysis and Price-to-Book Value (P/BV), Price-to-Earnings (P/E), and Price-to-Revenue (P/S) multiples.
GE Fair value
We arrived at a fair value per share of US$26.96, representing a 2.7% upside from the current market price of US$26.26. Based on the weighted average fair price, the GE Financing business unit is valued at US$11.39 per share and GE Industrial unit, US$15.58 per share.
|Sum of Parts Valuation (Per Share Value)|
|GE Financial business||11.39|
|GE Industrial business||15.58|
|Fair Value Per Share||26.96|
|Upside/(downside) from current levels||2.7%|
Fair value of GE Financing business unit
We valued GE Financing based on the weighted average of the DCF approach, P/BV, P/S, and P/E multiples, assigning weights of 40%, 20%, 20%, and 20%, respectively. GE Financing's valuation based on DCF, P/B, P/E, and P/S is US$12.55, US$8.60, US$9.98, and US$13.24, respectively, resulting in a weighted average price of US$11.39 per share.
|Weighted average fair price - GECS|
|Fair price using DCF approach||40.0%||12.55||5.02|
|Fair price using P/BV approach - 2009||20.0%||8.60||1.72|
|Fair price using P/E approach - 2009||20.0%||9.98||2.00|
|Fair price using P/S approach - 2009||20.0%||13.24||2.65|
|Weighted average fair price - GE Financials||11.39|
P/BV based valuation
We estimated GE Financing's book value per share to be US$6.9 per share in FY 2009. Based on a P/BV multiple of 1.3x, a 15% premium to the peer group average, GE Financing is valued at US$8.60 per share.
|Relative Price/Book value valuation||2008||2009||2010|
|Book value per share||6.4||6.9||7.4|
|GE Financing Price/book value fair price||8.37||8.60||8.72|
P/E based valuation
We estimated GE Financing's earnings per share at US$0.94 in 2009. Based on a P/E multiple of 10.62x, at a 5% premium to the peer group average, GE Financing is valued at US$9.98 per share.
|Relative Price/Earning valuation||2008||2009||2010|
|Earning per share||0.96||0.94||1.00|
|GE Financing Price/Earning target price||12.32||9.98||8.66|
P/S based valuation
GE Financing's revenue per share was projected to be US$7.08 in 2009. Based on a P/S multiple of 1.9x, at a 6% premium to the industry average, GE Financing is valued at US$13.2 per share
|Relative Price/Revenue valuation||2008||2009||2010|
|Revenue per share||7.25||7.08||7.27|
|GE Financing Price/Revenue target price||14.5||13.2||12.4|
Fair value of GE Industrial business unit
We valued GE Industrial based on the weighted average of the DCF approach, P/S, and P/E multiples, assigning weights of 40%, 30%, and 30%, respectively. Based on the DCF, P/E, and P/S approaches, GE Industrial was valued at US$14.11, US$16.65, and US$16.69, respectively, resulting in a weighted average price of US$15.58 per share.
|Weighted average fair price - GE Industrial|
|Fair price using DCF approach||40.0%||14.11||5.64|
|Fair price using P/E approach - 2009||30.0%||16.15||4.85|
|Fair price using P/S approach - 2009||30.0%||16.96||5.09|
|Weighted average fair price -
P/E based valuation
GE Industrial's earnings per share was estimated ay US$0.99 in 2009. Based on a P/E multiple of 16.40x, at a 5% premium to the peer group average, GE Industrial is valued at US$16.2 per share.
|Relative Price/Earning valuation||2008||2009||2010|
|Earning per share||0.84||0.99||1.29|
|GE Industrial Price/Earnings target price||16.0||16.2||18.1|
P/S based valuation
We calculated GE Industrial's revenue per share to be US$9.68 in 2009. Based on a P/S multiple of 1.8x, at a 5% premium to the peer group average, GE Industrial is valued at US$17.0 per share
|Relative Price/Revenue valuation||2008||2009||2010|
|Revenue per share||9.49||9.68||11.17|
|GE Industrial Price/Revenue target price||17.8||17.0||18.0|