General Electric remains the dominant force in the US electrical equipment sector and despite below ...
General Electric remains the dominant force in the US electrical equipment sector and despite below average returns over the past year.
General Electric (GE), which constitutes 84.6% of the electrical equipment sector of the S&P 500 and 4.2% of the overall index, returned 3.35%in dollar terms over the year to 6 November. Over the same time period the electrical equipment sector returned 389.50% while the overall S&P 500 returned 155.36%, in dollar terms.
Douglas Wright, US fund manager at Britannic Asset Management, says he is overweight GE relative to the market. GE has exceeded profit expectations year to date, largely due to an unexpectedly high earnings announcement.
Earnings growth for the other quarters has been largely as predicted, but the outperformance in the second quarter will push profits up 17% for the year, against the expected 12-15%.
"The initiatives driving GE over the past few years have been the early recognition of globalisation and the shift to growing the services side of the business," Wright says.
Rupert Della Porta, US fund manager at Aberdeen, acknowledges GE's achievements, but reduced his exposure after GE's announcement in October of the Honeywell acquisition.
Della Porta had been 1.5% overweight relative to the market, with 5% of the fund invested in GE. "The Federal Trade Commission, scrutinising the acquisition, are very overworked, so it may take longer than expected and the stock may trade sideways in the meantime," he explains.
GE's chief executive officer Jack Welsh's announcement that he will stay for another year to see the acquisition through has been well received, but Della Porta is still concerned about the succession process.
GE's largest competitor, making up 4.866% in the electrical equipment sector, is Emerson Electric.
Chris Galleymore, US fund manager at Henderson, says despite his wariness of capital goods, Emerson is one of the few he holds. Galleymore points to the company's unbroken run of earnings growth stretching back over 35 years. He adds: "Emerson's P/E relative to the market is the lowest it's been for a long time, over a 20 year view."
Wright is also positive about Emerson since its stock has risen nearly 30%, in dollar terms year to date, relative to the market. Della Porta believes new chief executive David Farr has injected new life into the company, helping a stagnant growth rate of 10-11% rise to 12-14% year to date. Farr's decision to diversify into higher growth sectors like telecoms, and sell off less profitable areas of business has made the stock more attractive, Wright says.
Although Emerson's growth is slightly weaker than GE's, it is accelerating and is available at better value than GE, he adds.
Elsewhere in the sector, investor interest appears weak. Anne Hall, US fund manager at Hendersons, says Power One has benefited from the demand for uninterrupted power supply, driven largely by the tech sector. Power One stocks started the year at $15 and are currently trading at $77, having peaked at $89. Hall and Della Porta both admitted to missing out on this impressive growth.
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