The Best Conglomerate Stock for 2011 (MMM, GE, HON, UTX, BRK-B)

We have already issued many sector calls for 2011 with our outlooks and we have even given a 2011 DJIA target of 13,042 based upon the same methodology that got us within about 1% of the DJIA close for 2010.  Now we are looking at the world of the larger conglomerates to see which of the peers have the best chance of outperforming in 2011.  In this review, we have highlighted reviews of 3M Co. (NYSE: MMM), General Electric Co. (NYSE: GE), Honeywell International Inc. (NYSE: HON), United Technologies Corp. (NYSE: UTX) and Berkshire Hathaway Inc. (NYSE: BRK-B).

We have looked at the closing prices, dividend yields, expected upside to the Thomson Reuters consensus targets for a year out, and looked at the past performance and expected upside for what lies ahead.  There is a clear winner by our take for 2011.

3M Co. (NYSE: MMM) closed out 2010 at $86.30 and its shares saw range of $68.96 to $91.49 in 2010.  If you adjust for its dividend payments, the return for 2010 was just over 7% for the year.  Its dividend yield is 2.4% and has raised its payouts over and over year after year.  Management change has been on the forefront and it underperformed during 2010.  The consensus price target of $99.38 implies expected upside of a tad above 15% for 2011.

General Electric Co. (NYSE: GE) closed out 2010 at $18.29 and its shares saw range of $13.75 to $19.70 in 2010.  If you adjust for its dividend payment changes, the return for 2010 was over 24%.  The company is likely to raise its dividend in 2011 again and it is buying back stock.  The most recent Jeff Immelt presentation was about growth and its opportunities rather than asking for atonement.  The $21.00 consensus price target still leaves upside of almost 15% for 2011.

Honeywell International Inc. (NYSE: HON) closed out 2010 at $53.16 and its shares saw range of $36.69 to $54.21 in 2010.  If you adjust for its dividend payments, the return for 2010 was just under 40% for the year and it has a dividend yield of 2.3%.  The consensus price target of $57.53 implies expected upside of only about 8.2%.

United Technologies Corp. (NYSE: UTX) closed out 2010 at $78.72 and its 52-week range was $62.88 to $79.70.  It has a 2.1% dividend yield and its shares rose just over 16% in 2010. With a mean price target of $87.13, the implied 2010 upside is about 10.6%.

Berkshire Hathaway Inc. (NYSE: BRK-B) (using B-shares for better liquidity) closed 2010 $80.11 and its 52-week range was $64.72 to $85.86.  There are too few analyst estimates to really predict what the real price target should be.  Due to it being added to the S&P 500 and other indexes and splitting its shares after the BNSF acquisition, Berkshire Hathaway’s B-shares rose almost 22% in 2010.

Here is where this gets interesting, 3M and GE are neck and neck when it comes to implied upside to the consensus price target, with 3M technically winning if you trust Wall Street analysts.  GE also retook the share performance lead in 2010.  Unless some of those calls that have gone without success to remove GE management, GE will likely be on more solid footing throughout the early part of 2010 as the reports throughout 2010 showed that 3M is looking for a succession plan for CEO George Buckley.

Another issue is that 3M rose about 2.7% in December versus closer to a 16% gain for G.E.  The long and short is that there are just more investors who wanted to buy GE going into the end of 2010 than there were in 3M.  GE is also in the midst of the NBC Universal transaction and it can slim down its portfolio through time if so chooses.  Jeff Immelt has recently been touting growth and the return to a normal environment and has been continuing to get GE Capital to shrink as far as a part of the entire company.

The long and short of the matter is that Berkshire Hathaway had a lot of propelling issues that are not repeat events.  Your weighting to an index can of course increase, although the magnitude of an index entrance is far greater than an additional weighting.  Honeywell, 3M, and United Tech are getting very close to the pre-meltdown levels again.  General Electric is still at less than half of its peak price from late-2007.

Even if GE cannot get back to $40.00 and higher in the near future, investors are going to likely feel as though there is just more upside remaining here in GE shares over its large conglomerate peers.  The $195 million market cap now puts GE back as the #4 stock on our proprietary Real-Time 500 of America’s largest companies.  The company’s engine portfolio, water portfolio, oil & gas services portfolio, alternative energy, and its select healthcare portfolio are likely to be winners when you consider a shrinking impact of GE Capital.  Another bonus is that Jeff Immelt has signaled that he intends to repay Berkshire Hathaway its billions from the preferred offering it issues to Uncle Warren when the rumors were out that GE was in real financial malaise.

It is hard to keep calling for one to be a winner when the upside remaining is actually less than its entire run the month before.  Difficult or not, GE remains our top conglomerate pick for 2011.  That $21.00 consensus target has risen in recent weeks and months.  When we ran the same analysis a year ago, GE was at $15.13 and the target was calling for virtually the same upside of 14.5% and a target price of $17.33.  It was between $20.00 and $20.50 not too long ago.

If GE can keep delivering on its improving metrics, the consensus analyst target is likely to be lifted even higher than $21.00.  We won’t be shocked in the slightest if GE shares would take a breather after such a solid gain last month to close out 2010.  We would not even be shocked if some of the formal ratings are cut based upon intermediate valuations.  If cuts do come, that would presumably come after earnings in a couple weeks.

Longer term beyond 2011, GE shares could be worth much more than that $21.00 target.  We even recently named GE as one of the top ten stocks to own for the next decade.  If the economy does not re-falter in a year or in 2012 as the election mess creates gyrations, it is possible that analysts will be calling for share prices of $25.00 or even higher.  For now, we are just focusing on 2011 and we do not want to get too far ahead of the curve.

Some reporting changes are coming and GE does of course have much currency exposure to the globe.  Either of those can throw some curve balls to shareholders in the near-term until it becomes properly digested.  Keep in mind that GE stock is not likely to run a straight line higher and higher.  Caveats aside, GE has been our top conglomerate pick for some time.  That remains the same for the start of 2011 based upon the current prices and forward valuations against peers.  If that changes, you’ll read about it here.

JON C. OGG