06/08/98 ONLINE ORIGINAL: IS GE STILL A NO-BRAINER FOR INVESTORS? PRETTY MUCH

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IS GE STILL A NO-BRAINER FOR INVESTORS? PRETTY MUCH

When it comes to investing in as grand an American business as General Electric (GE), the question isn't so much why buy the stock, but why not buy it?
One concern might be that GE's much-lauded chairman and chief executive, Jack Welch, who is credited with creating more shareholder wealth than any other CEO in history, is retiring in 30 months.
Wall Street isn't worried for now, however. Although a succession plan hasn't been announced, Welch's dynamic style has created great management depth at the company, analysts say. "When he turns his keys in, he will never look over his shoulder," declares Nicholas P. Heymann of Prudential Securities. Heymann adds that even if the next CEO stumbles, the positive momentum Welch has created will propel the company forward for years after he's gone. Besides, the thinking on the Street goes, Welch wouldn't retire unless he were confident that his successor will build on his stellar record.
"I do suspect that there could be some uncertainty surrounding a new chairman or a new office of the chairman, simply because they are new," says Russell Leavitt, an analyst with NationsBanc Montgomery Securities. But he guesses that such concerns might hold back the stock only temporarily. "One of the great things about GE has always been its ability to identify superior management," he adds. "I don't think that's going to change."
TOO HIGH? That leaves really just one other possible reason not to buy the stock: its high price relative to the market. GE closed on May 28 at 84 3/8, which is down a bit from its 52-week high of 89 7/16 on Apr. 3. The company's total return, including its 1.4% dividend yield, is 37% in the past year, 100% in the past two years, and 300% in the last five. Its price earnings ratio on this year's earnings is 30, about a 30% premium to the S&P 500's p-e of 23.
That's too high for Standard & Poor's equity research, which rates the stock a hold. S&P equity analyst Josh Harari expects GE's earnings to grow at about 14% a year long term, which is less than half its current p-e. (Analysts often judge a stock a good buy when its p-e is equal to or lower than its growth rate.) Although the stock remains in several of S&P's selected portfolios, "we feel the current price fully reflects GE's current potential," Harari says. "It's just a matter of the earnings catching up to the price."
Nearly all the other analysts who cover the stock rate it a buy, according to Zacks Investment Research. Consensus estimates are for GE to post earnings per share of $2.81 this year and $3.19 in 1999. In 1997, GE earned $2.46 a share, or $8.2 billion on $90.8 billion in sales.
Heymann, an unabashed GE bull and one of the most respected analysts covering the company, thinks GE deserves a 50% premium to the market. He expects earnings growth to improve each year until it reaches 17% earnings growth by the end of the decade. "People are starting to appreciate that in fact we could reach 17%," he says. "They don't really believe it, but are starting to believe it." He expects the stock to trade at a minimum of 125 by the time Welch retires. But he thinks it could be as high as 150 by then. "There is a lot more upside," he says.
ASIAN OPPORTUNITIES. How can such a huge company improve earnings faster than the 13.7% growth it produced in 1997? Heymann is banking on GE's ability to seize opportunities such as those it is finding in Asia right now. GE Capital (the segment that accounted for 42.3% of GE's revenues last year) recently acquired a significant stake in a large, troubled Japanese life insurer. The premiums from the policies it is starting to write there will generate a huge supply of capital at less than half GE's internal cost of capital, says Heymann. The company will use that resource to expand further into Asia, and then other developing nations, fueling its global expansion and earnings growth, says Heymann.
That plan is similar to the strategy GE used to expand into Europe during that region's recession in the early '90s -- which positioned the company to benefit from Europe's current recovery. But this time GE will invest "twice as much in less than half the time that it took to expand through Europe," Heymann wrote in a recent report. "The result should be a strong, sharp rise in the investment community's confidence that GE will be able to sustain the strong double-digit earnings-per-share growth rates of 17% or more at which we predict it will end the decade."
Whether the Asia expansion proves as profitable as Heymann expects remains to be seen. But GE has proven itself able to generate solid earnings progress "with much less risk than most companies," says Leavitt. "It is at a premium valuation, but you get an awful lot for your money." In an environment where the market's direction seems a bit unclear at the moment, that sounds like a like a ringing endorsement.
By Amey Stone
Associate Editor, Business Week Online

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