As with the rest of the market, General Electric Co. (NYSE:GE)'s stock has rallied significantly off its March closing low ($6.66, 3/5/09). It maybe more comforting that the stock now seems to have firmly developed support above $10 per share. While not significant from a fundamental stand point. $10 stocks are sometimes a key threshold for certain mutual funds or a significant psychological threshold for many retail investors. I mentioned in a previous post about GE’s good fortune after surprisingly poor headlines (a dividend cut and the loss of its sterling credit rating) that the stock may no longer be within the risk tolerance of its traditional investor base - conservative, income oriented investors. GE’s stock, however, should be very compelling to a new set of investors, i.e., value investors.
Crude GE Cash Flow Valuation
GE Cash Flow from Operating Activities was reported as $19.1 billion in 2008. This includes $2.4 billion dividend from GECS which we can conservatively assume will be zero in 2009. This would imply that cash generated from its “traditional” businesses - infrastructure, consumer & industrial, and NBC universal - was $16.7 billion in 2008. Net capex in 2008 was $5.0 billion down from an average of approximately $9 billion in 2007 and 2006. Crudely speaking, GE ex-GECC had $11.7 billion of free cash flow in 2008.
With no growth and a 10% discount rate, this implies $117.0 billion in value. GE ex-GECC carries only $13.2 billion in debt leaving $103.8 billion in value for equity. GE’s current market cap $115.53 billion @ $10.94 per share. Does this mean GE is fairly valued or maybe even slightly over valued? Maybe. Maybe not. Let’s not forget that this crude valuation assumes that the non-GECC business will never grow again AND that the Company will never receive value from the GE Capital business ever again. The flip side of this argument is that there remains some risk that GECC will parasitically poach cash flow from GE’s core business for several years in order to service its significant debt burden ($193.7 billion in debt). The Company did, however, announce 90% of its 2009 long term debt needs were financed, ostensibly the most difficult year for the Company to raise funds.
Some may also point out that GE’s infrastructure and NBC units are not likely to repeat their 2008 performance in 2009. Do not forget, however, that a cash flow valuation relies not on short term performance, but long term performance. Using a more representative model, we could assume that GE’s cash flow will decline in 2009 and then return to a growth rate more in line with GDP, very conservatively 2%. To target the $117 billion rate, GE’s cash flow could fall to $9.6 billion in 2009, or 18% from 2008’s level.
A Confirmation Valuation
I’ll admit, the discounted cash flow used above is rather crude.
