(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of General Electric Company (GE) have had a rough year, falling by nearly 45 percent as the company has gone through a series of changes, including bringing on new CEO John Flannery. As a result, GE has seen its earnings estimates for 2018 get slashed by 46 percent, to $1.03 from $1.92, at the start of 2017, according to YCharts. If GE earnings fall as sharply as Wall Street is forecasting, it would result in earnings dropping by nearly 3 percent in 2018.
Comparing GE to other companies which are expected to have flat or declining earnings could make GE worth as little as $11 a share. That's a decline of an additional 38 percent from its current level.
The market gives companies with flat or declining earnings a steep discount. Gilead Sciences Inc. (GILD) is expected to see its earnings drop by 22 percent in 2018 to $6.76, giving the stock a one-year forward multiple of just 11.
International Business Machine (IBM) is expected to have growth of only 1 percent in 2018, to $13.92 a share, while trading at a one-year forward multiple of 11. Ford is another such example, with its earnings expected to decline by 15 percent to $1.54 in 2018. It currently trades at only 8 times 2018 estimates.
Given GE's rough road ahead, it seems the company's valuation should reflect something closer to that of the Gilead, IBM, and Ford. Applying the same discount to GE as the other three companies, and giving GE a similar valuation to that of Gilead and IBM at 11, GE is worth roughly $11.3 a share. Now whether GE should trade at something higher could be a point of discussion, because we just don't know how long the earnings decline at GE will last.
A recent article in Barron's noted that shares of General Electric could fall another 15 percent from current levels to $15 based on technical analysis. The chart below shows how the next region of support for GE is right around $14.85.
It seems GE's current valuation of around 17 is just too high given the company's outlook, while the technical chart also points to a declining share price. Should the business outlook improve and signs of better days to come emerge, then perhaps the logic and valuation need to be addressed. But until then, GE seems overvalued at current levels.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.