Even at Seven Dollars, GE's Not Cheap

Discussion in 'Stocks' started by S2007S, Mar 4, 2009.

  1. S2007S


    Amazes me why anyone would invest in this market, if GE isnt cheap how many hundreds of stocks still arent as well.

    Even at Seven Dollars, GE's Not Cheap
    Posted Mar 04, 2009 11:33am EST by Henry Blodget in Investing, Recession, Banking

    Update: The accompanying video mentions newsletter writer Dennis Gartman, who made a bullish call on GE yesterday along with several other industrial firms, like U.S. Steel and Alcoa. In a phone conversation, Gartman told me he sold his GE stake this morning as the stock tumbled even while the broader market rallied. "Sometimes it only takes a day to figure out I'm wrong," he said. – Aaron Task

    From The Business Insider, March 4, 2009:

    We figured that, by now, GE's demolished stock must be screamingly cheap (because people were telling us it was cheap when it was $25). So we looked at the numbers. To our surprise, GE's still not cheap.

    Even in its shriveled state, GE is still trading at 17X trailing free cash flow. In a rip-roaring bull market, that might be reasonable (might). In today's market, it's startlingly expensive.

    How do we get there?

    At $7, GE has an equity market cap of $75 billion and net debt of $475 billion. Add those together, and you get an enterprise value of $550 billion. Last year, GE had free cash flow (operating cash flow less capital expenditures) of $32 billion. $550 billion divided by $32 billion gets you 17X.

    (True, finance businesses like GE Capital aren't often viewed this way, but GE has some industrial operations, too. And, ultimately, all that matters is to stakeholders is their share of the cash flow).

    The other problem for GE is that that $32 billion of free cash flow is likely to shrink as GE Capital's assets go bad and GE's industrial profits get squeezed. So GE's valuation on normalized free cash flow (post-GE Capital-boom-years) might be even higher.

    What would be a fair free cash flow multiple for a huge, mature company of this quality? Probably about 10X.

    Unfortunately, to trade at 10X, GE's enterprise value would have to get cut in half, to $300 billion. And that would wipe stockholders out.
  2. Daal


    Just take a look at the balance sheet. Its impossible to know where this will bottom, tangible equity almost non-existent