Over the past quarter, our group has conducted financial research on Fortune 100 company General Electric. The history of this company dates back to 1876 when Thomas Edison invented the incandescent electric lamp in a laboratory in Menlo Park, New Jersey. However, it was not until 1892 when a merger took place between his company Edison General Electric Company and The Thompson Houston Company that General Electric Company was formed (ge. com). By 1896 the company was trading publicly on the then newly launched Dow Jones Industrial Average.
Trading under the ticker symbol GE, General Electric is the only company from the original twelve stocks traded on the DJIA that is still listed on the index today. Currently, Jeffery Immelt serves as CEO for the Fortune #6 large cap conglomerate. Focusing on finance and technology, GE provides a vast array of products and services ranging from aircraft engines to consumer financing. Additionally, the company holds a 49% stake in NBC Universal (CNBC). As of 5/19/2011 GE boasts a market capitalization of $208. billion making it the largest amongst competitors in the Diversified Industrials sector. Looking at the last 52 weeks of trading activity, GE has traded in the range of $13. 75- $21. 65. Most recently, the stock closed at $19. 96 (as of 5/19/11), resulting in a Price to Earnings ratio of 15. 9. A visual depiction of GE’s movement over the past year is provided in Exhibit 1. With a Beta of 1. 66, it is evident that GE on average, is more volatile than the market. Although relatively a risky stock, buying in at the 52 week low of $13. 5 and selling at the top of its 52 week range would have earned investors an impressive return of 57. 5%. To compensate for the risk involved, GE returns an annual dividend of 60 cents to shareholders netting a dividend yield of 3. 01. Due to the blue chip nature of the company and the fact GE distributes an annual dividend, it is not surprising that the P/E ratio is lower than that of a company like Baidu (P/E ratio 74. 4) whose value is largely derived from potential growth opportunities as opposed to assets in place.
Note: (Detailed calculations of all preceding financials and ratios are displayed in Exhibit 2. All calculations for subsequent financials and ratios are viewable in Exhibit 3 unless otherwise mentioned. ) Delving deeper into the financials, we began by determining the intrinsic value of Using the Dividend Discount Method, GE’s intrinsic value was calculated to be (…) Applying the Dupont Model for years 2008, 2009, and 2010 we concluded the root of return discrepancy can be attributed to GE’s leverage over the three years.
In 2008, the leverage is 7. 622, which is much higher than the leverage in 2009 and 2010 (6. 666, and 6. 316 respectively). The difference of leverage in those years shows that GE used less equity in 2008 than they did in 2009 and 2010, allowing a larger ROE in 2008 (17. 283%) than the following years (9. 207% and 10. 513%). Going further we analyzed the company’s liquidity, activity, leverage, and profitability