Has the negative sentiment on GE gone too far?
With GE’s share price hitting a five-year low and analyst coverage turning negative. We thought it was time to have an objective look at the GE numbers using the interactive Valuecruncher valuation tool.
GE grew revenues from US$134.3 billion in 2004 to US$172.7 billion in 2007 – 8.75% compound annual growth rate. Our assumptions of revenues for the next three years are US$187.5 billion in 2008 growing to US$206.5 billion in 2010 – 6.1% compound annual growth rate. We have projected EBITDA margins increasing from 23.5% in 2008 to 24.5% in 2010.
We have used a terminal growth rate of 2.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 5% dropping to a 2% stable growth rate over the next ten years.
We have used a WACC (discount rate) of 6.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). We think this WACC of 6.5% is reasonable but recognise that the actual number could be as low as 5.5% or as high as 7.5-8%.
We used a terminal capital expenditure number of US$4.0 billion.
Our analysis incorporates the cash and debt on the GE balance sheet – Valuecruncher calculates a net debt number.
Our analysis gives a valuation of US$36.16 which is 32.1% above the current share price of US$27.38.
Based on our analysis, GE shares look cheap. Play with our assumptions – what does your analysis say?