If you believe in war - buy GE

Friday, April 15, 2005

A quick glance at the newswires gives the impression that Wall Streets hopes of the day are pinned to General Electrics. With earnings estimates centering around 37 cents a share in the first quarter there could be a positive surprise to the upside. While the once biggest company in terms of market capitalization, now overtaken by Exxon/Mobil, likes to portray itself as as a developer and marketer of a wide variety of products for the generation, transmission, distribution, control and utilization of electricity, they also have a strong focus on control systems which is a nice euphemism for military gear.
Not to forget the consumer finance division, which nicely contributed to past earnings. With waning consumer confidence and the interest rate rises up to date, these profits will probably have made contact with the squeezer recently. Is this a reason why the US government tightens the bankruptcy rules for consumers so that banks can keep the bad loans on their books?
The important Dow component is nevertheless likely to come up with good numbers because of this. As long as the Pentagon is supplied with government monies to keep the guns in Iraq red hot, GE can expect to pipeline a good share of it into its cash register. Remember the phrase computer wars the Pentagon likes so much. Remotely controlled war machines are the rage of the war-future. The Pentagon is believed to have awarded research contracts for war-robots at an amount of 127 billion $, making it the biggest-funded research project ever. NASA research figures look like the collection in a beggar's hat in comparison.
But this growth sector might be offset by the fact that GE too needs a lot of oil to produce electricity as US power plants relie so heavily on caloric energy to produce the clean power that keeps industry and households moving.
At a current PE ratio of 22 and a dividend yield of 2.5 percent the company managed to maintain comparably healthy key numbers up-to-date. But seeing other Dow behemoths falling from their cash-filled podium and thereby contrasting estimates, GE could be another catalyst for further declines of the share market than the Dow future already anticipates, being down some 30 points today.
Company insiders have stayed on the safe side. Except for CEO Jeffrey Immelt, who bought 27,590 shares in early February, the lower ranks decided to prefer the seller's side. Immelts most recent open-market purchase is not that significant when one considers his total holding of 711,000 shares at a value of about 25 million $.
History shows that the US economy's return to solid growth after periods of stagnation has always footed to a very good part on war spending. Take Korea, take Vietnam, take Kuwait. Defence spending pushes corporate growth as the Pentagon could never be called a hard bargainer when lavishing the taxpayers money on defence sector companies.


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