EXHIBIT L
EQUITY RESEARCH [BANC OF AMERICA SECURITIES LOGO]
UNITED STATES
Research Brief June 22, 2003
Electrical Equipment
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GENERAL ELECTRIC CO.
Going for Growth
(GE): $30.01
BUY
Volatility: Low
12-Month Target: $35.00
Total Return to Target: 19.2%
Nicole M. Parent
(212) 583-8047
nparent@bofasecurities.com
Paul A. Jacoby
(212) 847-5715
paul.jacoby@bofasecurities.com
* Co. confirmed guidance of $0.37-0.39 for Q2 & $1.55-1.70 for FY03. We remain
at $0.37 & $1.58, respectively. Q2 has come in on plan with NBC & Power
slightly better and Plastics & Equipment Mgmt slightly worse. Short cycle
orders are expected to be up 0-5% in Q2 with Plastics down ~15% (flat
sequentially) vs. tough comps. Co. reviewed 3 of its 6 growth platforms.
* Water Technologies is $1.4B platform expected to grow 20%+ annually. Recently
acquired Betz & Osmonics address $40B water & process market growing at 2-3x
GDP. Biz service model is compelling with 80% of sales recurring, 1/3 of
which are annual contracts.
* Interlogix (security) relies on leveraging strength in software/ IT. FY03
sales est. ~$1B (+30%), op margin 16%. Co. expects $3-4B+ sales by '06 (~50%
CAGR) due to tech investment, leveraging GE global distribution & acq.
Intelligent Video represents big growth opportunity. Acq. in Fire likely.
* Healthcare IT is $1.7B platform growing 30%+ annually. Biz is ~60% data acq.
devices & networking, & 40% clinical IT. Goal is to create digital hospital
(paperless/filmless/wireless). Mgmt targeting oppty in OR, ER, ICU.
* Valuation and Target Price Analysis Reiterate Buy Rating. We do see room for
the shares to move higher from current prices particularly as the company
delivers on realistic plans for FY03/FY04.
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SECTOR VIEW: We favor stocks with stable or improving fundamentals and solid
free cash flow that are leveraged to the domestic industrial recovery.
SECTOR PRICE APPRECIATION POTENTIAL (MEDIAN OF TARGET PRICE): 2%
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Top Picks
Ticker Rating Price Target
- ------ ------ ----- ------
DHR B $70.36 $78.00
GE B $30.01 $35.00
Least Favorites
NONE
NONE
B = Buy, N = Neutral, S = Sell, * = New Pick
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Company Data FYE Dec 2002 A 2003 E 2004 E
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52-Week Range $33-21 EPS
Secular Growth (EPS) 17% Q1 (Mar) $0.35 $0.32 A
Market Cap. $301.0 BB Q2 (Jun) 0.44 0.37
Avg. Daily Vol. 20,116,265 Q3 (Sep) 0.41 0.41
Debt/Cap. (3/03) 6.0% Q4 (Dec) 0.31 0.48
Est. Dividend/Yield $0.76/2.5% ----------------------------------------
- ------------------------------- Fiscal Year $1.51 $1.58 $1.70
----------------------------------------
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Index Data Calendar Yr $1.51 $1.58 $1.70
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DJIA 9201 P/E 19.9 19.0 17.7
S&P 500 996 P/E/G 117% 112% 104%
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Please see the important disclosures and analyst certification on page 7 of
this report. Investors should assume that Banc of America Securities is seeking
or will seek investment banking or other business from companies rated in this
report.
BANC OF AMERICA SECURITIES
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Company Confirms Q2 & '03 Guidance
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GE (GE, $30.01, Buy) management hosted an analyst meeting on June 20 in New
York City featuring three of its new growth platforms-Water Technologies,
Interlogix (security), and Healthcare IT. Management confirmed its prior
guidance range of $0.37-0.39 for Q2 and $1.55-1.70 for FY03. We remain at $0.37
and $1.58 for Q2 and FY03, respectively. The company is expected to narrow its
guidance range on its Q2 conference call July 11.
Q2 appears to be coming in on plan with NBC and Power slightly better than
expected and Plastics and Equipment Management slightly worse. Short cycle
orders are expected to be up 0-5% for the quarter with Plastics down ~15%
against difficult comps (orders were up 14% in Q202 on significant inventory
replenishment), but flat sequentially. Excluding Plastics and the impact of
acquisitions and F/X, short cycle orders are expected to be flat in Q2. (Please
see our GE orders note dated 6/18/03 for a more detailed review of short cycle
orders, especially Plastics.) Impact from SARS is diminishing, but its effects
have been felt to a limited extent at Aircraft Engines and Plastics. SARS
impact was also felt at Medical where revenue is expected to come in ~$30mm
light in Q2 reflecting travel and sourcing disruption as well as mix shift to
lower margin imaging like radiology which is favored in treatment of the
disease. NBC '03/'04 upfront advertising revenue was a record $4.8B with the
network taking impressive share of advertising spend (32% share of primetime
spend at networks, 50%+ of both late night and early AM). Scatter pricing is up
an estimated 25% in Q2. The '10 & '12 Olympics win not only includes
comprehensive media rights (not just TV) and enhanced GE sponsorship of the
event, but also represents $35-40B in total infrastructure spend in the host
cities for which GE is considered a preferred supplier. At Capital, gross
consumer delinquencies (30-day delinquencies before retailer risk-sharing on
private-label credit cards) increased to 5.82% in May vs. 5.27% last year, but
ticked down from 5.84% at the end of Q1. Commercial delinquencies were 1.90% in
May, down from 2.37% year ago and 1.92% in March. Management is relatively
pleased with the formal labor agreement reached on June 18 between GE and union
leadership which employees are expected to ratify by June 24.
GE's New Growth Platforms
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As GE looks to renew its business portfolio it is placing a lot of emphasis on
building-out new growth platforms. Before embarking on the ambitious program of
acquiring new platforms during the past 12-18 months, senior management
performed a rigorous analysis to identify attractive new growth areas. The
criteria for the businesses include: large infrastructure businesses with a
significant technology component, high growth rates with large addressable
markets, high contribution margin rates and low capital intensity, the ability
to maintain customer contact (not reliant on distribution), and opportunity for
service and financing components. The best ideas to come out of the screening
process so far have been water quality, security & sensors and healthcare IT
(each discussed below), as well as Hispanic media (Telemundo), oil & gas (we
think GE would buy solid product and service companies up to $2B in revenues
with margin expansion opportunities) and domestic consumer finance. Management
has indicated that it intends to be disciplined with respect to future
acquisition candidates, to target returns of 15% by year 5, and to focus on
companies with revenue in the $100mm to $2B range. (At the same time the
company will also be looking to sell pieces of lower return businesses both in
Industrial ($1-5B) and Capital ($5-10B)). The company is on track to meet its
goal of $8-10B in growth capital available this year ($4B at Industrial, $4-6B
at Capital), and '04 is expected to be at a similar level.
Nicole M. Parent (212) 583-8047 General Electric Co.
1
BANC OF AMERICA SECURITIES
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Below we discuss GE's new growth platforms that were presented at the analyst
meeting:
Water Technologies
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GE Specialty Materials CEO Bill Woodburn and GE Water Technologies CEO George
Oliver provided an overview of the business. Water Technologies is a leading
provider of engineered chemical treatment of water and industrial and
commercial process systems ($1.1B annual revenue, capabilities acquired with
Betz in Q202), as well as a leading supplier of mechanical separation equipment
for water purification and fluid filtration ($300mm revenue, capabilities
acquired with Osmonics in Q103). Acquisition integration is proceeding
smoothly. Compared to the period prior to being acquired, Betz customer churn
has declined to 3% from 10%, sales rep turnover has declined to 2% from 10% and
growth has increased to 5%+ from (4%). Operating profit margin is expected to
be ~15% in '03, increasing to 20% by '06.
GE's water businesses address fast growing segments of a $40B piece of the
$360B global water & process market. Target segments include chemicals &
services ($11B market), filtration consumables ($9B), modular equipment ($8B),
as well as opportunities in waste & environmental services, smart & contractual
services, custom equipment and maintenance. In aggregate, these businesses are
growing at 2-3x GDP, have a high return on capital (15%+), and play to GE's
strengths in technology, distribution and services. GE expects to leverage its
global distribution capabilities and strong customer relationships to grow core
revenue while it adds related businesses to fuel expected 21% annual growth-
half organic / half acquired-through '06 (to $3.0B). GE recently had >$1B in
the Water acquisition pipeline focusing on areas like services, water process
and process chemistry.
The business' service model is compelling with 80% of sales recurring, one-
third of which are annual contracts. George Oliver (former VP & GM, GE Engine
Services) is applying his GEAE experience to the Water platform where he is
focusing the segment on GE's competitive strengths by further enhancing the
service delivery component of the business. GE is also placing more of a focus
on technological innovation-capX as a percentage of sales is expected to be ~4%
in '03 and to increase to 6% in '04 vs. an estimated 2% at Betz prior to the
acquisition which was not making the investments needed to spur growth.
Heavy industry (metals & mining, petrochemical, hydrocarbon processing)
represents the largest end market served (40-50% of sales). We estimate that
power customers represent ~15% of sales. High purity process industries (food &
beverage, pharma & medical) activity is being driven by regulatory changes.
Middle market commercial and institutional business requires fairly narrow
service requirements but add up to a significant portion of the business in
aggregate. Geographically, revenue is ~67% in the Americas, 25% in Europe and
8% in Asia. The opportunity in Asia is driven by massive infrastructure build-
out opportunities in China, which management estimates is a $500mm market
growing at 15-20% annually. On the competitive landscape, GE is the #2 player
in water management chemicals and services, with a ~15% share. Suez's Ondeo-
Nalco is the global leader with ~25% of the market and Ashland's Drew
Industrial business is #3. Other major competitors include ChemTreat ($150mm
sales), Buckman Laboratories ($235mm sales in water treatment, mostly for pulp
& paper) and Baker Petrolite (serves primarily refining & petrochemical
plants). The remainder of the market is fairly fragmented.
There is an excellent article in the May 21/28 issue of Chemical Week regarding
the water treatment industry. If you would like a copy of the article, please
contact us.
General Electric Co. Nicole M. Parent (212) 583-8047
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BANC OF AMERICA SECURITIES
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Interlogix (Security)
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GE Industrial Systems CEO Lloyd Trotter and GE Interlogix CEO Ken Boyda
provided an overview of the GE Interlogix security business. Interlogix is
targeting the $32B security equipment market but has no plans to enter the $24B
security monitoring market. Interlogix' strategy relies on leveraging the
company's strength in advanced technologies (digital video, wireless
components) and software in order to develop complete enterprise IT/software
security solutions for customers. (See our BAS FIRE & SECURITY ROUNDTABLE note
dated 5/14/03 for more industry & competitor details).
The security electronic equipment market is growing 10%+ annually (vs. ~5% for
monitoring). GE sizes the market opportunities for Interlogix as follows:
Intrusion ($9B market), Fire Services ($5B), Access Control ($4B), Video
Surveillance ($4B), Asset Surveillance ($4B), Inspection/Detection ($1-2B) and
All Other ($4-5B). Interlogix is expected to have sales of ~$1B in FY03, up 30%
from $700mm in 2002. Company sales by product category include Intrusion (39%
of sales), Video Surveillance (19%), Inspection/Detection (14%), Access
Controls (10%), Fire (7%) and Other (11%). Interlogix sales by end user are
~33% residential, 30% commercial, 20% institutional (government, non
governmental organizations, universities, hospitals) and 17% industrial. ADT is
Interlogix' #1 customer. Operating margin is estimated to be ~16%-Video,
Inspection and Other segments enjoy operating margins of 20-25% while the rest
have estimated margins of 10-15%.
Interlogix appears to be benefiting from GE corporate resources in many
respects-research centers, globalization, technology from other platforms like
Medical, Power, Industrial; productivity initiatives, as well as acquisition
and integration expertise. (Interlogix is itself a roll-up of 32 security
companies that was still in the process of integrating its many pieces when GE
bought it in Q102.) We expect the GE brand and distribution capability will be
a major boon for the organization as it moves aggressively to produce a more
robust offering. Management expects $3-4B+ sales by '06 (~50% CAGR) driven by
technology investments, leveraging GE global distribution and acquisitions.
Operating margin is forecast to exceed 20% by '06. On the acquisition front,
the company has recently been working on 4 deals that would add a total of ~$1B
in annual revenue. In addition to recent acquisitions in networked video
(International Fiber) and advanced sensors (Ion Track) we would not be
surprised to see Interlogix pursue a fairly large player in fire safety given
Interlogix' relatively low exposure to that segment. Company is also currently
focusing R&D spend and/or exploring acquisition targets in HVAC controls,
biometrics, standalone keypads and card readers & badges. Company spends ~5% of
annual sales on R&D in the Intrusion segment (other segment figures not
available).
Intelligent video represents one of the company's biggest growth opportunities
and is expected to grow 28% in 2003. The total digital video market is expected
to be $550mm in 2003 vs. $3.2B for more traditional analog technology. Digital
market is expected to grow almost 7x to $3.8B by 2006 while analog is forecast
to shrink to $2.5B, and Interlogix is well-positioned to take advantage of this
technology upgrade. Digital video offers significant savings in media storage
costs and maintenance & repair vs. traditional VCR technology. Digital
equipment is also more reliable and offers greater functionality (e.g., to
search, scan, zoom images). Wireless Intrusion technology is one of Interlogix'
key strengths, and it is one of the fastest growing segments in Intrusion.
Since ~40% of residential installations in the U.S. contain wireless components
Interlogix' share represents a good installed base to add-on other products and
services or the potential to upgrade to more advanced solutions. Interlogix is
also making use of trace detection
Nicole M. Parent (212) 583-8047 General Electric Co.
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BANC OF AMERICA SECURITIES
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technology acquired with Ion Track earlier this year. Interlogix currently
addresses the $1B trace detection market which is growing 13-15% annually but
plans to expand its market to include the $1-2B bulk detection (for luggage,
shipping containers) which is growing 15% annually. The business would make use
of Medical Systems CT and Gamma camera imaging technologies.
Healthcare IT
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GE Medical Systems CEO Joe Hogan provided an overview of the GE Healthcare IT
growth platform. GE Healthcare IT is a $1.7B platform growing 30%+ annually. It
is relatively further along the platform development progression than Water or
Interlogix and is well into its build-out phase (having already passed through
define & launch, and reshape phases). Management believes that the digital data
revolution in healthcare is likely to turn the corner into widespread
availability and use within the next few years, and GE has invested heavily in
businesses to help lead the charge. Clinical information systems are aiming to
remove the media that healthcare information currently travels on in order to
create a digital hospital that is paperless, filmless and wireless. A recent
Banc of America Securities Hospital CIO Survey points to accelerated healthcare
IT market growth of approximately 12% in 2003 versus 10% in 2002 (and 5-7% in
2001). Growth in hospital IT spending is being driven by continued improvement
in hospitals' financial condition and a clear focus by hospitals on clinical
workflow efficiency and preventable medical errors, although other capital
spending initiatives (facility expansion/ improvements, capital equipment)
frequently get a higher priority. Cost reduction strategies as well as slowly
improving managed care pricing and reimbursement rate give-backs are helping to
drive IT sales. IT operating expenses at hospitals remain relatively small
compared to other industries--spending on IT represents 2.7% of a typical
hospital budget versus the corporate America average of 5-8% and the still
higher average (10-12%) in transaction intensive industries like financial
services.
Clinical system installations (both large and expensive) should be among the
leading drivers of growth, expected to be up 20% in 2003. Leading IT spending
priorities (in order) have been identified as computerized physician order
entry (CPOE) systems, handhelds for clinicians, PACS (Picture Archiving
Communication System), ambulatory medical records, clinical data repositories,
point-of-care computers and surgical information systems. GE's major healthcare
IT competitors include Meditech, 3M Health Information Systems, SoftMed
Systems, Misys/Sunquest, Cerner, Eclipsys, IDX Systems, McKesson and Siemens.
GE Healthcare IT consists of data acquisition devices ($960mm '03E sales, +11%
y/y), and networking and clinical IT ($540mm, +30% y/y). Devices are
integrating and making accessible patient information at bedside or remotely.
Opportunities are especially plentiful in the operating room. GEMS aims to
capitalize on the trend to move beyond IT investment in peripheral medical
functions of admissions, billing and hospital administration, by focusing on
opportunities in the mission-critical, clinical activities (operating room,
emergency room, intensive care unit). GEMS sees opportunities in further
building out the platform into adjacent areas of the $25B healthcare IT market,
especially in pharmacy IT and physician order entry and scheduling. The recent
Millbrook acquisition (physician office administrative IT) is a good example.
GEMS' Centricity PACS (Picture Archiving and Communication Systems) and RIS
(Radiology Information System) technology are market leaders. Currently fewer
than 10% of healthcare institutions use PACS and fewer than 20% of the ~6,500
U.S. hospitals use PACS on an enterprisewide basis. This represents a huge
opportunity. GE PACS revenue is expected
General Electric Co. Nicole M. Parent (212) 583-8047
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BANC OF AMERICA SECURITIES
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to reach $500mm (+25%) in '03. We should note that the competition may not be
far behind. Philips is positioning to be a big player in digital image
management systems with >1,000 systems installed, 70% of which are in the U.S.,
but we believe the company may be having some difficulty integrating some of
its recent acquisitions.
GEMS is trying to close its deal to purchase Instrumentarium, a leader in
anesthesia and critical care patient monitoring systems used principally in
operating rooms and intensive care units. The vast majority (80-90%) of
Instrumentarium that revolves around patient monitoring will be folded into GE
Healthcare IT. This includes the major Instrumentarium critical care brands
Datex-Ohmeda (anesthesia), Spacelabs (patient monitors and IT, acquired in
September) and Deio (operating room IT). The Instrumentarium deal has received
a second request by both the European Union and U.S. Department of Justice.
Furthermore, it has recently been reported in the press that the European
Commission is expected to demand disposals in patient monitoring, mobile x-ray
machines and mammography equipment before approving the deal, but GE remains
comfortable with the prospects for the deal closing in Q3. The E.U. Commission
expects to complete its investigation of the deal by September 11 (which
represents a delay compared to the original August 13 deadline set by the
commission).
Some Thoughts on Valuation
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Modest (and better quality) earnings growth at GE in the face of a more
challenging economic environment where other companies are struggling to post
growth we believe makes GE shares attractive particularly in light of a
dividend yield of 2.5%. We do believe that investors will again gravitate
toward the higher quality names in the space (GE, DHR) as managements come
clean on Q2 conference calls. If we are honest, we'd argue that business trends
at companies that we've seen so far in May are probably a bit worse on the
margin. Clearly the market is looking ahead to 2004 but we stand firm that
2H03 estimates are too high for many of the names who have rallied sharply
since March. This means 2004 estimates are driven off the wrong base, in our
view, (and in many cases still don't fully reflect pension headwind or options
expensing). GE shares have outperformed the S&P 500 by 1.4% vs. group average
outperformance of 5.8% over the past month. Relative to several of the big 20%+
movers in our space, we'd argue GE's numbers probably have less room to come
down (we'd argue there could now be upside to our $1.58).
We believe chairman and CEO Jeff Immelt has a clear vision for the company. He
has articulated his plan to divest some of the more volatile, slower growing
businesses and to expand the company's healthcare IT, water technology and
services, oil and gas, security and sensors, Hispanic broadcasting and U.S.
consumer finance businesses. We are comfortable with our 2003 estimate of
$1.58, which we believe is predicated on very realistic (and rather
conservative) assumptions. Divestitures are quite likely and would be viewed
positively. The formal agreement on June 18 between GE and IUE-CWA union
leadership concerning a new contract, while expected, is a net positive for GE
shares. Union members are expected to ratify the new agreement by June 24.
Nicole M. Parent (212) 583-8047 General Electric Co.
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BANC OF AMERICA SECURITIES
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General Electric
Quarterly Earnings Model
($mm)
Q1A Q2A Q3A Q4A 2002A Q1A Q2E
REVENUES MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03
Aircraft Engines 2,577 2,764 2,721 3,079 11,141 2,383 2,626
Consumer Products 1,968 2,152 2,116 2,220 8,456 1,838 2,109
Industrial Products and Systems 1,629 1,899 1,880 2,033 7,441 1,887 2,026
Medical Systems 1,863 2,212 2,130 2,750 8,955 2,140 2,367
NBC 1,998 1,987 1,370 1,794 7,149 1,471 1,888
Plastics 1,179 1,420 1,329 1,317 5,245 1,262 1,278
Power Systems 5,271 6,526 5,123 6,006 22,926 4,234 4,242
Specialty Materials 401 608 689 708 2,406 677 778
Transportation Systems 482 594 521 717 2,314 520 576
GE Manufacturing Subtotal 17,368 20,162 17,879 20,624 76,033 16,412 17,890
Global eXchange Services 105 104 102 0 311 0 0
Eliminations (725) (807) (595) (900) (3,027) (654) (537)
------ ------ ------ ------ ------ ------ ------
GE MFG TOTAL REVENUES 16,748 19,459 17,386 19,724 73,317 15,758 17,353
GECS Revenues 13,899 13,852 14,981 15,455 58,187 14,730 14,706
Total GE Revenues 30,647 33,311 32,367 35,179 131,504 30,488 32,059
Eliminations (126) (97) 218 199 194 (22) (160)
------ ------ ------ ------ ------ ------ ------
TOTAL GE REPORTED REVENUES 30,521 33,214 32,585 35,378 131,698 30,466 31,898
YR/YR REVENUE CHANGE
Aircraft Engines -5.9% -9.5% -4.6% 12.2% -2.2% -7.5% -5.0%
Consumer Products 1.1% 6.3% -1.7% -3.9% 0.2% -6.6% -2.0%
Industrial Products and Systems -3.6% 5.1% 18.8% 22.2% 10.4% 15.8% 6.7%
Medical Systems 1.9% 12.9% 6.9% 4.6% 6.5% 14.9% 7.0%
NBC 47.9% 8.5% 30.5% 16.7% 23.9% -26.4% -5.0%
Plastics -18.6% 4.2% 5.9% 11.0% -0.1% 7.0% -10.0%
Power Systems 23.7% 26.9% 1.7% 4.1% 13.4% -19.7% -35.0%
Specialty Materials -17.5% 23.3% 61.7% 71.8% 32.4% 68.8% 13.0%
Transportation Systems -12.0% 3.8% -12.4% 12.0% -1.7% 7.9% -3.0%
GE Manufacturing Subtotal 6.6% 10.5% 5.5% 9.2% 8.0% -5.5% -11.3%
GE Mfg Total Revenues 5.7% 10.6% 6.3% 8.2% 7.8% -5.9% -10.8%
GECS Revenues -5.6% -3.8% 12.7% -3.0% -0.3% 6.0% 6.0%
Total GE Revenues 0.2% 4.1% 9.1% 3.0% 4.1% -0.5% 6.2%
Eliminations -9.4% -41.6% -207.4% -208.2% -128.0% -82.5% -0.5%
Total GE Reported 0.3% 4.4% 10.6% 4.1% 4.8% -0.2% -3.8%
Eliminations as % of sales 4.2% 4.0% 3.3% 4.4% 4.0% 4.0% 3.0%
Eliminations as % of op 1.5% 2.4% -4.2% 3.8% 1.2% 2.7% 3.0%
Q1A Q2A Q3A Q4A 2002A Q1A Q2E
OPERATING PROFIT MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03
Aircraft Engines 421 566 512 561 2,060 474 551
Consumer Products 1ll 148 97 139 495 113 155
Industrial Products and Systems 123 157 153 164 597 139 174
Medical Systems 266 401 347 532 1,546 306 438
NBC 313 545 330 470 1,658 343 594
Plastics 207 275 224 137 843 91 132
Power Systems 1,552 1,910 1,418 1,375 6,255 896 891
Specially Materials 47 94 56 8.5 282 59 132
------ ------ ------ ------ ------ ------ ------
Transportation Systems 53 124 91 134 402 69 114
Total GE Manufacturing 3,093 4,220 3,228 3,597 4,138 2,490 3,182
Global eXchange Services 5 10 1 0 16 0 0
------ ------ ------ ------ ------ ------ ------
Eliminations & other (45) (102) 134 (135) (164) (67) (95)
------ ------ ------ ------ ------ ------ ------
GE MFG TOTAL OPERATING PROFIT 3,048 4,118 3,362 3,462 13,990 2,423 3,086
GE Capital Net Income 1,657 1,327 1,551 91 4,626 1,670 1,605
------ ------ ------ ------ ------ ------ ------
GE Total Segment Profit (incl. Mfg
eliminations) 4,705 5,445 4,913 3,553 18,616 4,093 4,691
Other Income (JVs, etc.) 86 103 486 431 1,106 76 100
Minority Interest (42) (50) (45) (46) (183) (32) (50)
GE Mfg OP Elimination (from above) (45) (102) 134 (135) (148) (67) (95)
------ ------ ------ ------ ------ ------ ------
Corporate Items & Eliminations
(Sep '02) (1) (49) 575 250 775 (23) (45)
GE MFG OP Elimination
(from above) 45 102 (134) 135 148 67 95
GECS Goodwill Amortization
(Sep '02) 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Interest and Other (157) (75) (212) (125) (569) (208) (300)
Earnings, pre-tax 4,592 5,423 5,142 3,813 18,970 3,929 4,441
Taxes (1,074) (997) (1,055) (711) (3,837) (715) (766)
------ ------ ------ ------ ------ ------ ------
EARNINGS FROM CONTINUING
OPERATIONS 3,518 4,426 4,087 3,102 15,133 3,214 3,675
Shares Outstanding 10,033 10,029 10,017 10,017 10,024 10,017 10,017
EPS FROM CONT. OPS ('02 &
BEYOND ex. GW) $ 0.35 $ 0.44 $ 0.41 $ 0.31 $ 1.51 $ 0.32 $ 0.37
EPS-% CHANGE 17.0% 14.0% 24.9% -21.0% 7.4% -8.5% -16.9%
Q3E Q4E 2003E 2004E
REVENUES SEP-03 DEC-03 ANNUAL ANNUAL
Aircraft Engines 2,721 3,064 10,794 10,414
Consumer Products 2,170 2,447 8,563 8,680
Industrial Products and Systems 2,005 2,536 8,333 8,867
Medical Systems 2,343 3,012 9,862 10,789
NBC 1,370 2,055 6,784 6,784
Plastics 1,329 1,340 5,209 5,711
Power Systems 4,611 5,952 19,038 18,357
Specialty Materials 758 598 2,812 2,980
Transportation Systems 531 756 2,384 2,503
GE Manufacturing Subtotal 17,838 21,761 73,779 75,086
Global eXchange Services 0 0 0 0
Eliminations (535) (488) (2,213) (2,253)
------ ------ ------ ------
GE MFG TOTAL REVENUES 17,303 21,274 71,566 72,833
GECS Revenues 16,148 18,370 63,873 70,100
Total GE Revenues 33,450 39,644 135,439 142,933
Eliminations (167) (57) (407) (368)
------ ------ ------ ------
TOTAL GE REPORTED REVENUES 33,283 39,586 135,032 142,565
YR/YR REVENUE CHANGE
Aircraft Engines 0.0% -0.5% -3.1% -3.5%
Consumer Products 2.5% 10.2% 1.3% 1.4%
Industrial Products and Systems 6.6% 24.8% 12.0% 6.4%
Medical Systems 10.0% 9.5% 10.1% 9.4%
NBC 0.0% 14.5% -5.1% 0.0%
Plastics 0.0% 1.8% -0.7% 9.6%
Power Systems -10.0% -0.9% -17.0% -3.6%
Specialty Materials 10.0% -15.5% 16.9% 6.0%
Transportation Systems 2.0% 5.5% 3.0% 5.0%
GE Manufacturing Subtotal -0.2% 5.5% -3.0% 1.8%
GE Mfg Total Revenues -0.5% 7.9% -2.4% 1.8%
GECS Revenues 21.7% 18.9% 9.8% 9.7%
Total GE Revenues 7.8% 12.7% 3.0% 5.5%
Eliminations -0.5% -128.7% -309.7% -9.5%
Total GE Reported 3.3% 11.9% 2.5% 5.6%
Eliminations as % of sales 3.0% 2.2% 3.0% 3.0%
Eliminations as % of op 3.0% 1.5% 2.5% 1.2%
Q3E Q4E 2003E 2004E
OPERATING PROFIT SEP-03 DEC-03 ANNUAL ANNUAL
Aircraft Engines 533 500 2,058 2,021
Consumer Products 153 185 606 663
Industrial Products and Systems 176 321 810 971
Medical Systems 391 612 1,747 1,941
NBC 382 606 1,926 2,108
Plastics 153 186 562 840
Power Systems 959 995 3,741 2,754
Specially Materials 129 96 416 498
------ ------ ------ ------
Transportation Systems 101 162 446 476
Total GE Manufacturing 2,977 3,664 12,312 12,273
Global eXchange Services 0 0 0 0
------ ------ ------ ------
Eliminations & other (89) (56) (308) (147)
------ ------ ------ ------
GE MFG TOTAL OPERATING PROFIT 2,888 3,608 12,004 12,125
GE CAPITAL NET INCOME 2,204 2,222 7,677 8,730
------ ------ ------ ------
GE Total Segment Profit (incl. Mfg
eliminations) 5,092 5,829 19,681 20,855
Other Income (JVs, etc.) 120 204 500 500
Minority Interest (45) (67) (194) (187)
GE Mfg OP Elimination (from above) (89) (56) (308) (147)
Corporate Items & Eliminations
(Sep '02) (14) 81 (1) 166
GE MFG OP Elimination
(from above) 89 56 308 (147)
GECS Goodwill Amortization
(Sep '02) 0 0 0 0
------ ------ ------ ------
Interest and Other (300) (392) (1,200) (1,200)
Earnings, pre-tax 4,867 5,575 18,811 19,968
Taxes (719) (800) (3,000) (2,978)
------ ------ ------ ------
EARNINGS FROM CONTINUING
OPERATIONS 4,148 4,775 15,811 16,990
Shares Outstanding 10,017 10,017 10,017 10,017
EPS FROM CONT. OPS ('02 &
BEYOND ex. GW) $ 0.41 $ 0.48 $ 1.58 $ 1.70
EPS-% CHANGE 1.5% 53.9% 4.6% 75%
Source: Banc of America Securities LLC estimates, company reports
General Electric Co. Nicole M. Parent (212) 583-8047
6
BANC OF AMERICA SECURITIES
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REG AC - ANALYST CERTIFICATION
The primary research analyst whose name appears in this research report
certifies that: (1) all of the views expressed in this research report
accurately reflect his or her personal views about any and all of the subject
securities or issuers; and (2) no part of the research analyst's compensation
was, is, or will be directly or indirectly related to the specific
recommendations or views expressed by the research analyst in this research
report.
- --------------------------------------------------------------------------------
IMPORTANT DISCLOSURES
Banc of America Securities LLC Stock Rating System
The rating system is based on a stock's forward-12-month expected total return
(price appreciation plus dividend yield). The prospective rates of return that
help define the Buy, Neutral and Sell ranges are subject to change from time to
time, corresponding with changes in prospective rates of return on competing
investments. The specific volatility levels that divide our stocks into low,
medium, high and extreme ranges are subject to change from time to time,
corresponding with changes in the volatility of benchmark indexes and the
companies that comprise them.
Volatility Ratings
---------- -------
Buy Neutral Sell
--- ------- ----
Low 0-30% 10%+ 9%-(6)% (7)% or worse
Medium 31-40% 15%+ 14%-(10)% (11)% or worse
High 41-70% 25%+ 24%-(15)% (16)% or worse
Extreme 71%+ 50%+ 49%-(25)% (26)% or worse
Source on volatility: Bloomberg
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Rating Distribution
US Coverage
Coverage
Universe Companies Percent Investment Banking Clients Companies Percent*
- ------------------------------ ------------------------------------------------
Buy 248 41 Buy 209 84
Hold 321 53 Hold 267 83
Sell 42 7 Sell 34 81
Diversified Industries
Sector
Coverage
Universe Companies Percent Investment Banking Clients Companies Percent*
- ----------------------------- -------------------------------------------------
Buy 9 30 Buy 7 78
Hold 20 67 Hold 15 75
Sell 1 3 Sell 0 0
* Percentage of companies in each rating group that are investment banking
clients.
As of 06/01/2003.
- --------------------------------------------------------------------------------
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companies mentioned in this report is disclosed below. The absence of any such
Nicole M. Parent (212) 583-8047 General Electric Co.
7
BANC OF AMERICA SECURITIES
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disclosure means the analyst(s) preparing this report does not have any such
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General Electric Co. (GE)
- --------------------------------------------------------------------------------
Target Price, Valuation Method, Risk Factors
Target Price: $35.00
Valuation Method
Used To Reach Applying ~15% premium to the S&P '04 forward-P/E of 18X
Target Price: to our 2004 EPS est. of $1.70.
Risk Factors:
1. Delayed macroeconomic recovery could mute short cycle recovery and therefore
contribution to earnings in near term.
2. Further erosion at key Power and Aircraft Engine customers could also
pressure earnings over and above what we ve modeled.
3. GE's earnings guidance is dependent upon acquisitions which may not
necessarily materialize.
4. Impact of SARS could disrupt company cost initiatives in Asia and slow sales
growth there.
- --------------------------------------------------------------------------------
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Danaher Corp (DHR)
- --------------------------------------------------------------------------------
Target Price, Valuation Method, Risk Factors
Target Price: $78.00
Valuation Method
Used To Reach We assume stock trades at 30% premium to S&P 500 year
TargetPrice: forward earnings.
Risk Factors
1. Delayed macroeconomic recovery could mute short cycle revenue recovery.
2. Integration issues with recent acquisitions could negatively impact
profitability.
3. Impact of SARS could disrupt company cost initiatives in Asia and slow sales
growth there.
- --------------------------------------------------------------------------------
General Electric Co. Nicole M. Parent (212) 583-8047
8
BANC OF AMERICA SECURITIES
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GENERAL ELECTRIC CO. (GE) RATING SYSTEM AS OF JAN. 12, 2003
Stock Price Chart (rating and target New rating system:
price changes indicated) Buy, Neutral and Sell
U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system:
Current Analyst: Parent N. SB, B, MP, U and S
[Chart omitted reflecting stock price of General Electric from approximately
June 1, 2000 through May 30, 2003 incorporating Bank of America analyst
ratings.]
SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell,
CIT=Coverage in Transition
(C)FactSet Research 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DANAHER CORP. (DHR) RATING SYSTEM AS OF JAN. 12, 2003
Stock Price Chart (rating and target New rating system:
price changes indicated) Buy, Neutral and Sell
U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system:
Current Analyst: Parent N. SB, B, MP, U and S
[Chart omitted reflecting stock price of Danaher Corp. from approximately
June 1, 2000 through May 30, 2003 incorporating Bank of America analyst
ratings.]
SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell,
CIT=Coverage in Transition
(C)FactSet Research 2003
- --------------------------------------------------------------------------------
9
BANC OF AMERICA SECURITIES
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10