GE's New 2008 Fair Value: $33.75... Conglomerates Head Lower (GE, MMM, UTX, HON)

General Electric Co. (NYSE: GE) poor earnings report may be a shock to most.  When you consider that the annual preview was just given one month ago, this flies in the face of the economy and the financial malaise bottoming out around current numbers.

So what we wanted to do was come up with a fair market value based upon Jeff Immelt’s new guidance for 2008.  Immelt put guidance at $2.20 to $2.30.  If you take a mid-point of $2.25 and assign a fair market P/E multiple of 15, you derive a new fair value of $33.75 for the stock.

To make matters worse, investors in stocks will still want a return in the vicinity of 6% to 8% for taking the risk in equities versus fixed income.  If that is the case, then GE shares may see $31.25 to $31.83 for the required rate of returns to be in the stock.  Before this, GE’s shares had recovered nicely and analysts had an average target price that was north of $42.00.  Those targets will be coming down sharply.  Right before the open, GE shares are down over 11% at $32.60.  Interestingly enough, the 52-week low is $31.65.

Analysts will be looking for the fallout in other conglomerates this morning.  They’ll also hit financials, as if there are any safe zones after the news.  Management at 3M Co. (NYSE: MMM), United Technologies (NYSE: UTX), or Honeywell (NYSE: HON) might want to get their guidance for 2008 out today or Monday.  Those companies are all down this morning, but all are initially down by less than 2% right at the open as they are deemed as having lower exposure to the financial sector.

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Jon C. Ogg
April 11, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at [email protected] and he does not own securities in the companies he covers.