General Electric Company (GE: 15.25 -0.14 -0.91%) has more than a century of history behind it and it’s seen worse times than we’re going through right now. It’s a global juggernaut, and its foothold in emerging markets - particularly China - makes the company worth looking at.
But at the end of the day, its financial unit is holding GE back, and that isn’t likely to change any time soon.
General Electric remains the only company listed on the Dow Jones Industrial Average that was on the original index in 1896. It boasts more than 300,000 employees and has operations in 100-plus countries, making it a truly global company.
Of course, it’s GE’s operations in China that should be of particular note to investors.
GE’s presence in China can be traced back long before Nixon’s visit to the PRC in 1972, decades before China officially became Communist, and just 48 years after the Kowloon Peninsula was turned over to Britain after the Second Opium War. Fast-forward to 2009, and we can see the result of the company’s long-established inroads into China, where GE now operates 36 wholly owned or joint venture companies with more than 13,000 employees.
The company’s recent focus has been to supply the Red Dragon with alternative energy technology that can capitalize on the central government’s effort to cleanse its shoddy pollution record.
GE and ShenHua Group Corporation, one of the world’s largest coal and energy companies, last year agreed to create a joint venture using GE’s coal gasification. Meanwhile GE Aviation opened a new manufacturing facility in Suzhou, China to produce high-tech systems for commercial aircraft and GE Transportation formed a joint venture company with China’s CSR Qishuyan Locomotive Co., Ltd.
While that joint venture won’t officially begin until the end of 2011, the company will develop, build, and service GE’s Evolution Series locomotive diesel engines. This joint agreement follows a contract signed with China’s Ministry of Railways, in 2005, to supply 300 fuel efficient, low-emission Evolution Series HXN5 China Mainline Locomotives.
As of 2009, there were more than 100 Evolution Series locomotives in service. GE Transportation has realized $1.2 billion in China sales since 2005, as a result of its efforts.
Finally, GE in January signed a contract to supply 88 wind turbines - which will add 132 megawatts of wind energy capacity for three projects in Hebei and Shanxi provinces - to HECIC New Energy Co. Ltd. Wind power development is an important aspect of economic growth in China, which aims to increase its wind power capacity to 150 gigawatts by 2020.
Some 53% of GE’s 2008 revenue came from overseas, where the company raked in about $4.6 billion from China alone.
Indeed, GE’s China operations have helped beat earnings estimates by an average of 25.53% over the last five quarters.
The company’s net earnings decreased by 37% in 2009, but that’s mostly because of losses associated with GE Capital. If not for GE Capital, which saw its earnings plunge by 80%, GE’s net intake would have declined by just 7% in what was a tough year for many businesses.
Unfortunately for GE, its financial arm isn’t yet out of the woods. According to the latest Credit Card Index results from Fitch Ratings Inc., as of June 4, 2010, late stage credit card delinquencies fell for the fourth consecutive month - but charge offs have held steady at an astronomical 10%.
While it’s encouraging that the broader consumer credit card market is improving - it is still a long way from being healthy. Any pullback in the U.S. economy could do real damage to GE Capital’s operations and profitability - and ultimately the overall company’s bottom line.
As long as GE Capital remains hobbled by the U.S. economic anchor, the company as a whole could experience a hard fight to the upside - even with its ties to China.
From a technical outlook, GE stock has suffered a 19% drop from its recent highs in early April, 2010. It has found some support at $15.25 level, but the 21-day exponential moving average (EMA) is still trading under the 50-day EMA. That suggests the stock hasn’t yet recovered from the recent sell-off. Moving Average Convergence/Divergence indicator is still in negative territory as well, but it is improving.
These indicators could change quickly if China’s recently released economic numbers can fuel a sustained rally - but it’s still too early to tell.
So, with a slightly rich Price/Earnings (P/E) ratio of 17.12, GE stock is more of a “hold” than a “buy.”
If you already own GE shares, enjoy the roughly 2.6% dividend yield, know that there is not much more downside for the position (that hasn’t already been priced into the stock) and that it may be some time before the stock really gets moving again simply because of GE Capital’s headwind from an extremely turbulent economic environment.