Specialty Industrial Machinery company General Electric Company is taking Wall Street by surprise today, falling to $81.66 and marking a -1.6% change compared to the S&P 500, which moved -1.6%. GE is -9.38% below its average analyst target price of $90.11, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, General Electric Company shares have outstripped the S&P 500 by 6.2%, with a price change of -11.7%.
General Electric Company operates as a high-tech industrial company in Europe, China, Asia, the Americas, the Middle East, and Africa. It does not release its trailing 12 month P/E ratio since its earnings per share of $-4.54 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for GE of -18.0. Based on the company's positive earnings guidance of $4.25, the stock has a forward P/E ratio of 19.2.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US industrials companies is 21.46, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide General Electric Company's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.73. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of General Electric Company's gross profit margin trends:
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 74,196 | 53,896 | 27.36 | 13.48 |
| 2020-12-31 | 79,619 | 60,421 | 24.11 | -8.85 |
| 2019-12-31 | 95,215 | 70,028 | 26.45 | 11.13 |
| 2018-12-31 | 121,616 | 92,671 | 23.8 | n/a |
- Average gross margin: 25.4 %
- Average gross margin growth rate: 5.3 %
- Coefficient of variability (lower numbers indicating more stability): 6.9 %
General Electric Company's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in General Electric Company's free cash flow, which was $1,971,000,000 as of its most recent annual report.
The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $258,000,000 and they've been growing at an average rate of 331.2%. GE's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 0.4% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts).
General electric company's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.8, but is still below the average P/B ratio of the Industrials sector, which stood at 3.7 as of the third quarter of 2022.
Since it has a negative P/E ratio, a lower P/B ratio than the sector average, and an irregular stream of weak cash flows with an upwards trend, General Electric Company is likely fairly valued at today's prices. The company has strong growth indicators because of a PEG ratio of less than 1 and consistent gross margins with a positive growth rate. We hope you enjoyed this overview of GE's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
