This document provides a stock valuation of General Electric Company using several models. It first discusses GE's industry and company overview, strengths, and weaknesses. It then estimates the intrinsic value of GE's stock using the constant growth dividend model, residual income model, and market multiples approaches. The constant growth dividend model estimates a value lower than the current stock price, suggesting the stock is overvalued and recommending a short position.

1. Stock Valuation of
General Electric Company
Temiloluwa Vasco
FINC 6361 – Summer 2013
August 3, 2013

2. Table of Contents
Executive Summary...................................................................................................................................... 1
Introduction.................................................................................................................................................. 2
Economic Overview................................................................................................................................... 2
Industry Overview..................................................................................................................................... 2
Company Overview................................................................................................................................... 3
Company Strengths............................................................................................................................... 3
Company Weaknesses ......................................................................................................................... 3
Stock Valuation ............................................................................................................................................ 4
Constant Discount Growth Model ............................................................................................................ 4
Estimating the Growth Rate ................................................................................................................. 5
Estimating Expected Dividend .............................................................................................................. 5
Estimating the Required Rate of Return............................................................................................... 5
Capital Asset Pricing Model ............................................................................................................. 6
Dividend Discount Model................................................................................................................. 7
Bond Yield + 4% Model.................................................................................................................... 7
Required Rate of Return (Weighted Average of Methods) ............................................................. 7
Constant Growth Dividend Model Calculation..................................................................................... 8
Sensitivity Analysis................................................................................................................................ 8
Residual Income Model............................................................................................................................. 8
Price-Earnings Ratio Estimate................................................................................................................... 9
Price-Cash Flow Ratio Estimate ................................................................................................................ 9
Price-Sales Ratio Estimate ...................................................................................................................... 10
Conclusion .................................................................................................................................................. 10

3. 1
Executive Summary
I have applied fundamental analyses tools to estimate the intrinsic value for General Electric Company of
Fairfield, Connecticut. With an illustrious history, GE is the only company listed in the Dow Jones
Industrial Index today that was also included in the original index in 1896. A well-diversified industrial
corporation, the company’s product range includes jet engines, power generation equipment, financial
services, plastics and medical imaging.
GE’s strong financial position is hampered by a few variables that must be managed, such as the over-
diversification, concentration in the American and European markets and high debt levels. Despite these
challenges, GE has managed to deliver solid results with earnings of $16.1 billion and industrial cash flow
from operating activities of $17.8 billion in 2012 (General Electric, 2013). New projects in developing
markets and expansion of current markets will serve to strengthen the firm’s position and profit.
Five models or methods are used to estimate the intrinsic value of GE’s stock, specifically: the Constant
Dividend Growth Model, Residual Income Model, Price-Earnings Ratio Estimate, Price-Cash Flow
Estimate and Price-Sales Estimate. Each model produces results lower than current market price, so that
the current stock is considered over-priced. Since we would expect the market to self-correct toward
the lower intrinsic value of the stock, resulting in an expected U.S.decrease in stock market prices, the
recommended strategy is to short (sell) the over-priced stock at current market prices.

4. 2
I. Introduction
Economic Overview
The United States (“U.S.”) has the largest and most technologically powerful economy in the world, with
a per capita GDP of $49,800. In this market-oriented economy, private individuals and business firms
make most of the decisions, and the federal and state governments buy needed goods and services
predominantly in the private marketplace.
U.S. firms are at or near the forefront in technological advances, especially in computers and in medical,
aerospace, and military equipment. While U.S. business firms enjoy greater flexibility than their
counterparts regarding management decisions related to capital plant expansions, laying-off surplus
workers, and developing new products, they also face higher barriers to enter their global rivals' home
markets when compared to foreign firms entering U.S. markets. (Central Intelligence Agency (CIA), 2013)
Since 1996, dividends and capital gains have grown faster than wages or any other category of after-tax
income and imported oil accounts for nearly 55% of U.S. consumption. Between 2001 and 2008, soaring
oil prices dampened the housing market bubble, caused a drop in the value of the dollar and
deterioration in the U.S. merchandise trade deficit. The sub-prime mortgage crisis, falling home prices,
investment bank failures, tight credit, and the global economic downturn pushed the United States into
a recession by mid-2008. GDP contracted until the third quarter of 2009, making this the deepest and
longest downturn since the Great Depression. (CIA, 2013)
The government passed several bills between 2008 and 2011 in efforts to create jobs and help the
economy recover. Such bills provided funds to purchase equity in U.S. banks and industrial corporations,
for additional stimulus spending, tax cuts and health insurance reform. As a result, total spending on
health care rose from 9.0% of GDP in 1980 to 17.9% in 2010 and the federal budget deficit reached
nearly 9% of GDP in 2010 and 2011. In addition, the direct costs of the wars in Iraq and Afghanistan
totaled nearly $900 billion through 2011. Although the federal government reduced the growth of
spending in 2012, shrinking the deficit to 7.6% of GDP, U.S. revenues from taxes and other sources are
still lower, as a percentage of GDP, than those of most other countries. (CIA, 2013)
In December 2012, the Federal Reserve Board announced plans to purchase $85 billion per month of
mortgage-backed and Treasury securities in an effort to hold down long-term interest rates, and to keep
short term rates near zero until unemployment drops to 6.5% from the December rate of 7.8%, or until
inflation rises above 2.5%. However long-term economic problems, including stagnation of wages for
lower-income families, inadequate investment in deteriorating infrastructure, rapidly rising medical and
pension costs of an aging population, energy shortages, and sizable current account and budget deficits,
remain. (CIA, 2013)
Industry Overview
The U.S. Diversified Machinery Industry is recovering from the recession due to the increase in global
demand for machinery. Despite the setback from the recession, global markets, especially in developing

5. 3
countries, have helped balance out sales. Markets in China and India remain strong as development
continues, while U.S. companies involved in European markets are trimming down or selling off non-
core business endeavors. Because of the diverse nature of the industry, it had less exposure to the
recession than other niche industries and as the economy continues to recover, Diversified Machinery
companies such as General Electric are now posting profits. (Knight, 2010)
Company Overview
GE is the only company listed in the Dow Jones Industrial Index today that was also included in the
original index in 1896. GE traces its beginnings to Thomas A. Edison, who established Edison Electric
Light Company in 1878. In 1892, a merger of Edison General Electric Company and Thomson-Houston
Electric Company created General Electric Company. A well-diversified industrial corporation, the
company’s product range includes jet engines, power generation equipment, financial services, plastics
and medical imaging. (General Electric, 2013)
GE has posted earnings per share with an average growth of 8.65% in the past three years and profits of
$3.1 billion on revenues of $35.1 billion in its most recent quarter.
Strengths and weaknesses
STRENGTHS
Enhanced Reputation: General Electric has ventured into the world market thus gaining global
recognition for its unique goods and services. The Company’s products have been recognized for their
quality and the company is known for meeting customer-specific needs. As a result, it has attracted
numerous clients including corporations and government agencies and its competitive position is quite
favorable. In the year 2009, Forbes magazine ranked GE as the world's largest company and its brand
was the world's most recognized. This kind of recognition has given it a competitive edge over other
companies due to its ability to attract more customers. (Richet, n.d.)
Diversified lines of operation: GE has invested in a wide range of products under its units. These
activities range from technology, energy, automotives, and aviation and home appliances to financial
services and insurance services among other undertakings. This kind of diversification shields the
company from risks in case of misfortunes. (Richet, n.d.)
Strong R&D Capability: GE has utilized research and development in its ventures into environmental
initiatives Its 'Ecoimagination' program is undertaking the production of environmentally friendly
technologies, energy sources such as solar, low emission engines for airplanes, hybrid locomotives and
water purification. The company introduces new products each year that target its customer base or
expands into new markets. The ability to innovate is a source of competitive advantage to the company.
(Richet, n.d.)
WEAKNESSES

6. 4
Threat to flexibility: The Company currently utilizes a unique management style, whereby business
operations are divided into business units. Each business unit plays a distinct role within the company
and has its own independent management. Each unit is also part of its diversification strategy. Examples
include GE Commercial Finance, GE Equipment Services, GE Energy, GE Insurance, and GE Consumer
Finance among others. Such diversification and divisional structure can slow down decision making if not
properly managed. (Richet, n.d.)
High Debt Burden: The Company’s debt levels totaled $337.5 billion, an average annual increase of
36.70% since 1982. The company’s total debt to equity ratio increased 2.54 from 0.20 in 1982 to 2.74 in
2012. With increasing debt levels, the company is at risk of default, especially in light of the downgrade
of its creditworthiness from AA to Aa3 (or AA-) per Moody’s Credit Rating Agency.
Concentration in Eurozone and U.S. markets: The Company has significant operations in Europe and the
United Sates. As such, the weak Economic outlook for Eurozone and the US, two key markets of General
Electric, would put pressure on the revenues of the company. (yousigma, n.d.)
Stock Valuation
The intrinsic value of GE is estimated using several methods:
- Constant Dividend Model
- Residual Income Model
- Extrapolation using Price-Earning (P/E) Ratio
- Extrapolation using Price-Cash Flow (P/CF) Ratio
- Extrapolation using Price-Sales (P/S) Ratio
Constant Discount Growth Model
The Constant Dividend Model values a share of stock as the sum of all expected future dividend
payments, where the dividends are adjusted for risk and the time value of money and dividends are
assumed to grow at a constant rate g forever. In the constant discount growth model, stock prices
(today) are calculated as follows:
P0 = D1 / (ks-g)
Where g is the assumed growth rate, Ks is the discount rate or required rate of return and D1 is the
expected dividend. D1 can be calculated using the last known dividend and the growth rate as follows:
D1 = D0(1+g)
In order to calculate the Stock Price using the model, an estimate of the growth rate (g) and the
required rate of return (Ks) must be first calculated.

7. 5
Estimating the Growth Rate (g)
From Analyst estimates retrieved from www.finance.yahoo.com, we note that the growth rate for the
past 5 years is 0.56%, while the expected growth rate for the next 5 years is 10.24%. Therefore we
estimate our growth rate to be the average of the two rates:
g = (0.56% + 10.24%)/2
g = 5.42%
In addition, we note that the last paid dividend of $0.19 on June 20, 2013 is consistent with the $0.19
dividend paid five years ago on June 26, 2003. With no growth in our dividend, we will use the average
rate of historical and expected growth per analyst estimates.
Estimating the Expected Dividend (D1)
We calculate GE’s current year’s dividend (D0), which is the sum of the past four quarters of dividend
payments from information at www.finance.yahoo.com as follows:
Issue Date Dividend
6/20/2013 0.19
2/21/2013 0.19
12/20/2012 0.19
9/20/2012 0.17
Annual $0.74
With D0 calculated here and the growth rate estimated in the previous sub-section, we can now
estimate next year’s dividend (D1) using the formula previously given:
D1 = D0(1+g)
= $0.74 x (1+5.42%)
D1 = $0.78
Estimating the Required Rate of Return (Ks)
We will use three methods for estimating the required rate of return: the Capital Asset Pricing Model
(CAPM), the Dividend Discount Model (DDM) and the Bond Yield + 4% Model.
Capital Asset Pricing Model
The capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of
return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's
non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also

8. 6
known as systematic risk or market risk i.e. (β)), as well as the expected return of the market and the
expected return of a theoretical risk-free asset. The formula for the CAPM is as follows:
KRD = KRF + βRD (Market Risk Premium)
Where Market Risk Premium (MRP) = (KM – KRF)
Where KRD is the required rate of return, KRF is the return on risk free investment, βRD is the
market/systematic risk and KM is the expected return on the market.
We obtain the βRD from two sources, specifically www.finance.yahoo.com and www.morningstar.com
confirming the value to be 1.32. We also obtain the risk free rate (KRF) of 2.59% as represented by the
yield on the 10-year U.S. Treasury Bonds from www.finance.yahoo.com as well.
As our measure of historical returns for large cap stocks, we obtained the monthly stock price from 1950
to 2013 of the Standard & Poor’s 500 Index, which is designed to be a leading indicator of U.S. equities
and is meant to reflect the risk/return characteristics of the large cap universe. From the monthly
average return, we calculated the historical average annual return for large cap stocks to be 8.64%.
Hence, the Market Risk Premium is calculated as follows:
MRP = 8.64% - 2.59%
= 6.05%
Noting that the historical Market Risk Premium for large cap stocks is calculated to be 5.80 percent by
[text authors], we take an average of the two values to arrive at our MRP
MRP = (6.05% + 5.80%)/2
MRP = 5.92%
With MRP calculated, we calulcate the required rate of return/discount rate as follows:
KRD = KRF + βRD (Market Risk Premium)
= 2.59% + 1.32 (5.92%)
KRD = 10.41%
Dividend Discount Model (DDM)
Using the Dividend Discount Model (also the constant discount growth model), we can estimate the
required rate of return by solving for KRD
P0 = D1 / (kRD-g)

9. 7
KRD = D1/P0 + g
From previous sections, g is calculated to be 5.42%, D1 is calculated to be $0.78, and the current price is
$24.37. Hence, we calculate the required rate of return as follows:
KRD = $0.78/$24.27 + 5.42%
KRD = 8.62%
Bond Yield + 4% Model
In this model, the bond yield is dependent on the credit rating of the company plus 4%, which is
considered a reasonable incremental for a large cap mature stock like GE. Moody’s Credit Rating Agency
rated GE’s credit worthiness as Aa3 or AA-. From the composite bond yield rates available at
www.finance.yahoo.com, we find that AA 20-year Corporate Bonds have a yield of 4.19%, while A 20-
year Corporate bonds have a yield of 4.85%. Therefore GE’s AA- grade bonds would fall between the
range of 4.19% and 4.85%.
Noting that the bond ratings between AA and A bonds include AA- and A+ bonds, we prorate the
differential in points between the upper and lower yield limits and calculate the bond yield for AA-
bonds as follows:
Bond Yield = 4.19% + (4.85%-4.19%)/3
Bond Yield = 4.41%
Therefore KRD = 4.41% + 4.00%
KRD = 8.41%
With three estimates for KRD above, we calculate a weighted average of the three methods, using the
following subjective weights: CAPM 20%, DDM 60%, Bond yield+4% (20%).
Weighted Average Ks = 10.41%(0.20)+8.62%(0.60)+8.41%(0.20)
Weighted Average Ks = 8.93%
Constant Growth Dividend Model Calculation
With the reminder that P0 = D1 / (ks-g), where from the calcualtions above, D1 = $0.78, Ks = 8.93 and
g = 5.42%, the intrinsic value of the stock, using the constant growth dividend model is calculated as
follows:
P0 = $0.78 ÷ (8.93%-5.42%)

10. 8
P0 = $22.17
Sensitivity Analysis
We increase and decrease Ks and g by plus and minus 0.50% (.005) to find a range of values:
Ks g 5.42% + 0.50% 5.42% 5.42% - 0.50%
8.93% + 0.50% 22.17 19.41 17.26
8.93% 25.84 22.17 19.41
8.93% - 0.50% 30.97 25.84 22.17
As we can see from the above table, we find a range of values for General Electric Company from a low
of $17.26 to a high of $30.97. Since the market price of GE, $24.37, is in the upper range of intrinsic
value for GE, we conclude that it is overvalued.
Residual Income Model
The Residual income Model (RIM) determines the value of a stock by accounting for the income
generated by a firm after accounting for the true cost of capital, or the income in excess of
any opportunity costs measured relative to the book value of Shareholders' equity. The formula for the
RIM is as follows:
P0 = EPS1 – B0 x g / (k-g),
Where g is the assumed growth rate, Ks is the calculated required rate of return or discount rate, and
EPS1 is the expected earnings per share one year from now. EPS1 is estimated by
To estimate GE’s earnings per share one year from now, we note that GE’s earnings per share are
projected to grow at a rate of 1.09 percent per year, consistent with the calculated historical growth in
earnings per share from 2003 to 2012. If earnings continue to grow at this rate, next year’s earnings will
be equal to this year’s earnings times 1.0109. Current Earnings (EPS0) is noted to be 1.35 per
www.finance.yahoo.com. Therefore we calculate EPS1 as follows:
EPS1 = EPS0 (1+gEPS)
EPS1 = 1.35 x (1.0109),
EPS1 = 1.36
With our estimation of EPS1 above, the expected gEPS noted above, previous calculation of Ks in the
previous section and the retrieval of the current Book Value per Share (B0) of $11.95 per
www.finance.yahoo.com, we calculate the intrinsic value of the stock using the RIM model as follows:

11. 9
P0 = EPS1 – B0 x g / (k-g),
P0 = 1.36 – (11.95 x 1.09%) / (8.93%-1.09%)
P0 = $15.74
Comparing our intrinsic value per the RIM model to GE’s actual stock price of $24.37, we note that the
stock is overvalued.
Price-Earnings Ratio Estimate
GE has an average P/E Ratio of 14.70 for the past 5 years. Hence, we assume that the company’s stock
price will be 14.70 times its earnings per share one year from now. To estimate GE’s earnings per share
one year from now, we note that GE’s earnings per share are projected to grow at a rate of 5.42 percent
(g) per year as calculated earlier. If earnings continue to grow at this rate, next year’s earnings will be
equal to this year’s earnings times 1.0914. We obtain the current EPS of 1.35 from
www.finance.yahoo.com. Hence our calculation is as follows:
Expected Price = Historical P/E Ratio x Projected EPS
= Historical P/E Ratio x Current EPS x (1 + projected EPS growth rate)
= Historical P/E Ratio x Current EPS x (1 + g)
= 14.70 x 1.35 x 1.0524
Expected Price = $20.92
Comparing our expected price per the P/E ratio estimate model to GE’s actual stock price of $24.37, we
note that the stock is overvalued.
Price-Cash Flow Ratio Estimate
GE has an average P/CF Ratio of 5.70 for the past 5 years. Hence, we assume that the company’s stock
price will be 5.70 times its Cash Flow per Share (CFPS) one year from now. To estimate GE’s CFPS one
year from now, we note that GE’s CFPS is projected to grow at a rate of 10.17 percent per year,
consistent with the historical growth in CFPS from 1989 to 2012. If earnings continue to grow at this
rate, next year’s earnings will be equal to this year’s earnings times 1.1017. We obtain the current
Price/Cash Ratio of 8.81 from www.finance.yahoo.com, noting that the current price is $24.37.Hence
our calculation is as follows:
Expected Price = Historical P/CF Ratio x Projected CFPS
= Historical P/CF Ratio x Current CFPS x (1 + projected CFPS growth rate)
= Historical P/CF Ratio x Current CFPS x (1 + gCFPS)

12. 10
= 5.70 x $24.37/8.81 x 1.1017
= 5.70 x 2.77 x 1.1017
Expected Price = $17.36
Comparing our expected price per the P/CF ratio estimate model to GE’s actual stock price of $24.37, we
note that the stock is overvalued.
Price-Sales Ratio Estimate
GE has an average P/S Ratio of 1.24 for the past 5 years. Hence, we assume that the company’s stock
price will be 1.24 times its sales per share (SPS) one year from now. To estimate GE’s SPS one year from
now, we note that GE’s SPS is projected to grow at a rate of 6.36 percent per year, consistent with the
historical growth in earnings per share from 1982 to 2012. If earnings continue to grow at this rate, next
year’s earnings will be equal to this year’s earnings times 1.0636. We obtain the current Price/Sales
Ratio of 1.70 from www.finance.yahoo.com, noting that the current price is $24.37. Hence our
calculation is as follows:
Expected Price = Historical P/S Ratio x Projected SPS
= Historical P/S Ratio x Current SPS x (1 + projected SPS growth rate)
= Historical P/S Ratio x Current SPS x (1 + gSPS)
= 1.24 x (24.37/1.70) x 1.0636
= 1.24 x 14.31 x 1.0636
Expected Price = $18.87
Comparing our expected price per the P/S ratio estimate model to GE’s actual stock price of $24.37, we
note that the stock is overvalued.
Conclusion
The summary of the results of our valuation for GE stock using our five various methods are as follows:
Method Estimated P0
Constant Dividend Growth Method $22.17
Residual Income Method $15.74
P/E Ratio Estimate $20.92
P/CF Ratio Estimate $17.36
P/S Ratio Estimate $18.87
Actual Price $24.37

13. 11
We see that each model provides an intrinsic value estimate that is lower than the current price. As
such, we conclude that the stock is overpriced and would expect the market to adjust (decline)
accordingly. With an overpriced stock and our expectation of future decrease in price, the advisable
strategy would be to short (sell) the stock at today’s price.
However, as of June 30, 2013, GE Energy Financial Services India, a subsidiary, invested an approximate
22% stake in a 110 megawatt hydro-power project through a share subscription agreement in East
Sikkim to harness the water flow from the rivers Rangpo and Rongli, in a run-of-river design, with
turbines and generators supplied by Alstom India Ltd (General Electric Co, 2013). The following day, the
company announced its plans to expand its existing oil and gas facility in Fót, Hungary to host the state-
of-the-art manufacturing base of central unit control panels (UCP) for gas and steam turbine power
plants (General Electric Co, 2013). We therefore expect that the current price incorporated shareholder
expectations of returns on current investments. Hence, the expected decline in GE stock price could be
offset by gains from such projects.

14. 12
References
Central Intelligence Agency. (2013). The World Fact Book: United States - Economy. Retrieved August 1,
2013 from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
General Electric. (2013, July 26). Form 10-Q Quarterly Report. Retrieved August 1, 2013 from
http://quote.morningstar.com/stock-filing/Quarterly-Report/2013/6/30/t.aspx?t=XNYS:GE&ft=10-
Q&d=467d557449990fe54b28ec517303b854
General Electric Co. (2013, July 31). GE to Expand its Oil and Gas Facility in Fót, Hungary. Retrived August
1, 2013 from http://www.genewscenter.com/Press-Releases/GE-to-Expand-its-Oil-and-Gas-Facility-
in-F%C3%B3t-Hungary-4150.aspx
General Electric Co. (2013, July 30). GE Energy Financial Services Invests in Hydroelectric Power Project
in India. Retrieved August 1, 2013 from http://www.genewscenter.com/Press-Releases/GE-to-
Expand-its-Oil-and-Gas-Facility-in-F%C3%B3t-Hungary-4150.aspx
Knight, William T. (2010, October 13.) Equity Research on Tyco International Ltd. and Dover Corp. - An
Overview in the Diversified Machinery Industry. Retrieved August 1, 2013 from
http://money.cnn.com/news/newsfeeds/articles/marketwire/0672861.htm
Richet. (n.d.). SWOT Analysis of General Electric Company. Retrieved August 1, 2013 from
http://richet.hubpages.com/hub/SWOT-Analysis-of-General-Electric-Company
Yousigma. (n.d.) General Electric SWOT Analysis. Retrieved August 1, 2013 from
http://yousigma.com/comparativeanalysis/generalelectricswot.pdf