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Wednesday, August 16, 2006

GE On The Treadmill

Stocks: (GE)(SI)(UTX)(BRK-A)

The New York Times ran an article that claims that the problem with GE stock, which cannot get out of the mid-$30s is that conglomerates are hard to follow. Investors have to understand all of the divisions and how they work together to drive earnings up, and it is just too complicated.

Another theory recently floated about the stock is that because every institution in the world owns the stock, the supply of buyers does not exist. Good theory.

Of course, companies like United Technologies do not have the "conglomerate is too complicated" problem. The stock is up from a 52-week low of $49.29 to $61.03.

GE might be viewed as expensive by some metrics. It trades at 2.2 times revenues. United Tech trades at a 1.4 times ratio. Another conglomerate, Bershire Hathaway trades at 1.5 times revenues, and its stock has moved from $78,800 to $93,700, near its 52-week high.

The conglomerate theory about the GE stock seems kind of weak in the face of evidence about stock movements at other companies that should have the same problem. Lots of divisions. Complicated to understand. You would think that Wall St. analysts, who are a well-educated group would understand all of these companies.

GE's problem is that it has nice businesses that are growing at a decent clip, but it has done nothing special since Jack Welsh left. NBC is a sexy business. The financial services part of the business is a growth engine, although investors are always afraid the some complex load or financial instrument could blow up and hurt earnings. The medical, locomotive and jet engine businesses all do well.

If GE does not do something to turn the head of investors, its stock is not likely to move above $40. One possibility would be to buy Siemens, a company that is in a number of related businesses but has not done as well as GE. GE could fix the place up and improve Siemens earnings. Siemens has a market cap of $74 billion to GE's $343 billion. That could work. It would add $90 billion to GE's $150 billion, and with the huge diffence in market caps and modest diffrences in revenue, it may well make sense.

Siemens is on the ropes. The Wall Street Journal recently wrotes that: Based on Siemens AG's share-price performance, Chief Executive Klaus Kleinfeld hasn't had the greatest year and a half at the helm of the engineering and electronics conglomerate". Investors are impatient with Siemen's management. Well, GE may be able to fix that.

Douglas A. McIntyre can be reached at He does not own shares in companies that he writes about.

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