Exhibit M
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See Appendix A-1 for Analyst Certification and Important Disclosures
GENERAL ELECTRIC (GE)
GE: GE: MEETING HIGHLIGHTS GROWTH PLATFORMS, 1M (OUTPERFORM, MEDIUM RISK)
AFFIRMS Q2 MKT CAP: $298,749.3 MIL.
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UNITED STATES
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June 20, 2003 SUMMARY
* GE held an analyst mtg in NYC highlighting 3
MULTI-INDUSTRY of its new growth platforms: Water, Security and
Jeffrey T. Sprague, CFA Healthcare IT. These platforms generate $7
+1-212-816-6699 billion in profitable revenues today and are
jeffrey.sprague@citigroup.com expected to reach $12 billion by 2006.
John M. Roselli, CFA * GE CFO Keith Sherin affirmed Q203 guidance,
+1-212-816-2594 but did not narrow the full year range of
Mark Wilterding $1.55-1.70. We believe the range will be
+1-212-816-1910 narrowed downward when Q2 earnings are reported.
However, given the recent weakness in Plastics
orders, most of the Street has already nudged
estimates to the lower half of the range,
suggesting that a formal announcement will be a
non-event.
* Water is a $1.4B biz with an op margin of
~15%. GE's goal is to grow to it to $3B in revs
by 06 through a combination of mkt growth, share
gains, and acqs.
* GE plans to grow its security biz to $3-4B by
06 from $1B today, driven by $1-2B in acqs, and
a $1B in organic growth. We reiterate our
Outperform (1M) rating and $35 target. Our
group is rated Overweight.
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FUNDAMENTALS
P/E (12/03E) ................... 18.8x
P/E (12/04E) ................... 17.1x
TEV/EBITDA (12/03E) ............ 12.7x
TEV/EBITDA (12/04E) ............ 12.1x
Book Value/Share (12/03E) ...... $6.64
Price/Book Value ................ 4.5x
Dividend/Yield (12/03E) ........ $0.76/2.5%
Revenue (12/03E) ................ $130,705.0 mil.
Proj. Long-Term EPS Growth ...... 10%
ROE (12/03E) ................... 21.1%
Long-Term Debt to Capital(a) .... 14.3%
GE is in the S&P 500(R) Index.
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(a) Data as of most recent quarter
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SHARE DATA RECOMMENDATION
Price (6/19/03) ....... $29.86 Current Rating ............ 1M
52-Week Range ......... $32.89-$22.00 Prior Rating .............. 1M
Shares Outstanding(a).. 10,005.0 mil. Current Target Price ...... $35.00
Convertible ..................... No Previous Target Price ..... $35.00
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EARNINGS PER SHARE
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FY ends 1Q 2Q 3Q 4Q Full Year
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12/02A Actual $0.35A $0.44A $0.41A $0.31A $1.51A
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12/03E Current $0.32A $0.38E $0.41E $0.48E $1.59E
Previous $0.32A $0.38E $0.41E $0.48E $1.59E
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12/04E Current NA NA NA NA $1.75E
Previous NA NA NA NA $1.75E
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12/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
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First Call Consensus EPS: 12/03E $1.60; 12/04E $1.74; 12/05E $1.91
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OPINION
GE held an analyst meeting in NYC highlighting 3 of its new growth platforms:
Water, Security and Healthcare IT. Through a series of acquisitions and organic
growth these business have grown substantially. The Healthcare IT initiative
got under way in 1999 and the Security and Water initiatives are less than 18
months old but the company already has $7 billion in profitable revenues in
these platforms today. GE projects that additional acquisitions and organic
expansion will drive these business to $12 billion by 2006. Given the vast size
of the relevant served markets that projection could prove conservative.
GE CFO Keith Sherin affirmed the Q2 guidance of $0.37-0.39. He did not formally
narrow the $1.55-1.70 guidance range for 2003. We believe the range will be
narrowed with a
Citigroup Global Markets
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downside bias when Q2 earnings are reported. However, given the recent weakness
in Plastics orders, most of the Street (including our recent $0.03 reduction to
$1.59) has already nudged estimates down to the lower half of the range,
suggesting that GE's potential range narrowing will likely be a non- event.
Economic conditions were characterized as sluggish, although they appear stable.
Plastics orders for example are down 15% yr/yr against a tough comp, but are
flat sequentially. Short cycle orders excluding Plastics (ex. acquisitions and
F/X) are flat in Q2, improving from the Q1 decline of 4%. NBC scatter pricing
remains very strong, up 25% in Q2. The company also indicated that SARS had
some impact on Medical, Aircraft and Plastics in the quarter, but the impact is
now diminishing. NBC and Power performed better than expected in the quarter
offsetting the overall weakness in Plastics and any SARS impact across the
businesses. Sherin reaffirmed comfort with the goal of divesting $1-5 billion
of industrial businesses in 2003. We also believe the company is close to
divesting FGIC from GE Capital which could go in the $2 billion +/- range.
GE WATER: "TAPPING" A SIGNIFICANT LONG-TERM GROWTH OPPORTUNITY
Water Technologies CEO George Oliver outlined the strategy and growth
opportunities for GE's newly formed water business. GE entered the water
industry through the $1.8 billion acquisition of BetzDearborn in April 2002 and
followed it with the $250 million acquisition of Osmonics in February 2003.
GE's Water Technology portfolio includes chemical and wastewater management
products (including agents and reactants), monitoring and diagnostic devices,
membrane separation systems and process treatment equipment. Chemical and
wastewater management products include corrosion inhibitors and sterilizing
equipment for use in industrial machinery, HVAC systems, and various flow
control applications. The company's process treatment products are designed to
maintain environmental standards for various end-users including food &
beverage, chemical processing and power generation companies.
The current water business generates $1.4 billion in revenues with an operating
margin of ~15%. The company's goal is to reach $3 billion in revenues by 2006
(a 21% CAGR) through a combination of market growth, share gains, and
acquisitions. Acquisitions are expected to account for half of the growth over
the next few years. Areas targeted for acquisition include services, water and
process chemistry, membranes and filtration and modular equipment. GE
estimates that ~80% of current water revenues are recurring but only 5% are tied
to contractual services. Ultimately, GE's goal is to generate 25% of Water
Technologies top-line from contractual services and another 50% from annual
purchase agreements.
GE's strategy is to transform the water business into a fixed-price, total
solutions model by bundling equipment, consumables and long-term service
agreements. It is the same formula first implemented at GE Aircraft Engines.
At Engines, the total solutions model substantially improved margins and
accelerated organic growth and GE hopes to do the same with the water business.
GE's goal is to extend the typical water customer contract to 3-5 years from 1
year currently and move to a fixed price contract which would generate ~$150K
per customer per year on average, up from the current usage-based model which
generates only
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~$60K/year. GE Water is also expanding it presence globally with new plants and
investment in Eastern Europe, the Middle East and China. The business currently
generates ~65% of revenues in the Americas, ~25% in Europe, and ~10% in the rest
of the world.
The attractiveness of the water industry has drawn the attention of several
companies in our coverage list, including ITT Industries, Danaher, GE, and SPX
Corp. These companies have been attracted by the fragmented nature of the
industry, the growing supply/demand imbalance, increased regulatory
requirements, and new applications requiring higher levels of purification. All
of these factors suggest that the industry could provide sustainable growth well
above GDP for the foreseeable future, in our view. GE Water currently targets a
$40 billion sub-segment of the $360 billion water industry (see table below).
GE views these markets as the most attractive in the industry, given their
above-average growth rates (2-3X GDP), high technology base, value-added
service component, and low capital intensity/high ROIC. However, we would
not rule out a move into other adjacent markets in the water industry at some
point in the future. GE's chief competitors in these markets include Ondeo
Nalco, U.S. Filter, and Ionics.
GE WATER TARGET MARKETS
Waste Services $1B
Environmental Services $1B
Smart Services $1B
Contractual Services $1B
Chemicals & Services $11B
Filtration Consumables $9B
Modular Equipment $8B
Customer Equipment $5B
Maintenance $1B
TOTAL TARGETED MARKETS $40B
Source:GE
GE SECURITY: SECURING A FOOTHOLD IN THE ATTRACTIVE SECURITY INDUSTRY
Industrial Systems President and CEO Lloyd Trotter outlined the steps his
business has taken to integrate technology into the portfolio. Historically, a
focused product offering of steady growth industrial businesses has defined
Industrial Systems. We believe Interlogix, acquired in Q102, has established a
profitable high-tech platform with products that can be marketed through
existing channels.
Interlogix is a global leader in the electronic security technology industry.
The focus of Interlogix is to provide customers with communication technology
and security information that provides, life safety and lifestyle enhancements.
The emergence of Homeland Security and web-enabled premises management has
provided Interlogix with an opportunity to sell to residential and commercial
end markets. The global security market is estimated at $127 billion and is
divided into two segments: Service and Products. Service represents about $74
billion and Products represents about $53 billion of the global security market.
The Products segment is divided into two segments: Electronics and Mechanical.
GE is focusing on the $29 billion electronics segment. The company believes
that the Electronics market can grow more than 10% and can deliver operating
margins greater than 15%. GE's is targeting all of the major areas within the
electronics segment of the security market, including Access Control, Intrusion,
Fire Services, Video and Trace Detection/X-Ray.
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ELECTRONIC SECURITY MARKET
MKT SIZE GROWTH MARGIN
Access Control $4B 11% 10-15%
Intrusion $9B 6% 10-15%
Fire Services $5B 4% 10-15%
Video $4B 14% 20-25%
Trace Detection/X-Ray $7B 20% 20-25%
ELECTRONIC SECURITY MARKET $29B ~10% ~15%
Source: GE
GE purchased Ion-Track and Interlogix in 2002. Those companies provided the
platform for the Access Control, Intrusion, Video and Trace Detection
businesses. These businesses are generating $1 billion in run-rate sales in
2003 and sales are estimated to increase to $4 billion by 2006. In 2002, the
Ion-Track and Interlogix acquisitions provided a $740 million sales base. Since
then, Interlogix has been able to grow sales organically by ~21%. Organic
growth has come from new product launches. Interlogix has launched 38 new
products in 2002 and 52 in 2003 and plans to launch ~100 new products in 2004.
Bolt-on acquisitions accounted for ~13% of the sales growth since conception.
The company has a full pipeline of bolt on acquisitions under review, six in
Access Control, four in Fire Services, seven in Video and three in Trace
Detection.
Trotter noted that Digital Video was the most attractive area within the
electronics market. Currently, there is a movement away from analog towards
digital video. Digital video represents ~13% of the $3.7 billion Video market,
while Analog video represents~86% of the video market. Digital is growing at a
40% clip and analog is declining at an 8% rate. GE estimates that the Video
market will increase to $6.3 billion by 2006 and that digital video will
represent 60% of the market, while analog will represent 40% of the market. GE
plans to gain a significant portion of the digital video market by launching its
eTreppid video compression technology with in the next six months. eTreppid
compresses video so that 1/10th of the normal storage capacity is needed to
store data, while reducing bandwidth requirements and increasing video quality.
Ultimately, digital video allows users to improve productivity and performance,
while lowering infrastructure costs.
HEALTHCARE IT: RESHAPING HOSPITAL COMMUNICATION AND OPERATION
GE Medical Systems' (GEMS) CEO Joe Hogan provided an update on one of GE's more
established "growth platforms", Healthcare IT. In addition to GEMS competitive
advantage in imaging equipment, IT provides a significant long-term opportunity
for the company. GEMS Healthcare IT business is expected to grow 20%+ in 2003
to $1.7 billion, helping drive the expected 10-12% growth for the entire
segment. By 2006, management expects Healthcare IT to generate top-line of $4.0
billion with 25% operating margin (up from an estimated 18% in '03).
Pressure on reimbursement fees has created a consolidation and rationalization
of IT spending among healthcare providers. This bodes well for GEMS' networking
businesses, which can be integrated with the company's digital imaging products
to offer an integrated imaging solution, thereby reducing hospital costs
significantly. GE's networking capability is an essential component of its
product offering today, especially given the fact that procedures are viewed as
profit centers for healthcare providers.
Historically, most of the IT development in healthcare has been around
traditional functions such as admissions, insurance processing, billing, etc.,
rather than in the actual practice of medicine and diagnostics. However, the
largest cost and opportunity for error (with potential life or death
implications) is in places like the radiology lab, OR, or ICU. GE noted that
the #8 largest cause of death is medical error. The company is working to
integrate these
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functions and using the Six Sigma philosophy to eliminate opportunities for
error. Examples would be automated procedures that ensure the proper (as low as
possible) radiation doses for patients based on their size and weight or the
ability of a radiologist to embed commentary in a digital image that the
attending doctor or surgeon could reference at the time of treatment.
GEMS PACS (picture archival communications system), which is a subset of the IT
portfolio, is considered a key growth engine. As digital images proliferate,
the opportunity to store, share, protect and interpret the images is exploding.
GE believes it has about 30% share in this market and revenues are expected to
grow ~25% to $530 million in 2003. GEMS remarked that only about 10% of
hospitals have some type of image management system suggesting rapid growth
drive by new penetration.
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VALUATION
Trading at less than 17X our 2004 EPS estimate with a yield of 2.5%, we believe
GE shares remain attractive. However in the near term uncertainty about key end
markets and continued mixed economic news may keep GE in a relatively narrow
trading range. GE's relative dividend yield is at ~150% of the market yield,
which is near a 20-year high and well above its 20-year mean of 100%. Possible
positive catalysts in the next 6-12 months include portfolio repositioning to
enhance returns, possible pick-up in short cycle order trends, increasing
visibility on the actual bottom for Power and Aerospace and accretion from
acquisitions. Our 12-18 month price target remains $35. Our target assumes
that GE can trade at a 15% premium to our target group target multiple of 17.5X
forward earnings. Our group target multiple of 17.5X is based on our analysis
of early cycle valuations (i.e., valuations of depressed earnings) during the
early 1990s. Over the past 10 years, GE has averaged about a 20% premium to the
group, but given the difficulties in several businesses such as Power and
Aircraft and the higher contribution of earnings from Capital, we believe a
slightly smaller premium is warranted. However, we continue to believe the
stock deserves to trade at a premium based on its portfolio of world-class
businesses, excellent management team and financial metrics (e.g. cash flow,
ROIC, etc.). GE continues to execute well in a difficult economy and is
methodically repositioning the portfolio for better future growth and higher
returns. We reiterate our Outperform (1M) rating.
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RISKS
GE is one of the world's largest companies and as a result has exposure to
numerous global economic and political risks. Primary specific risks in the
near term include the potential for a further fall-off in the Power business due
to the distressed nature of GE's customers. GE is also exposed to the troubled
airline industry through its engine business and leasing business. We believe
it has managed its airline risks well, but the potential for further industry
deterioration remains a risk. The company has also struggled with losses in its
reinsurance business, which could result in charges against earnings to bolster
reserves. Continued improvement in short cycle businesses (NBC and Lighting) is
key to offsetting declining earnings in Power Systems. It is worth noting,
however, that further deterioration in Plastics fundamentals could continue to
pressure earnings. If the impact on the company from any of these factors
proves to be greater than we anticipate, the stock will likely have difficulty
achieving our target price.
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ANALYST CERTIFICATION APPENDIX A-1
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I, Jeff Sprague, hereby certify that all of the views expressed in this research
report accurately reflect my personal views about any and all of the subject
issuer(s) or securities. I also certify that no part of my compensation was, is,
or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
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IMPORTANT DISCLOSURES
- --------------------------------------------------------------------------------
General Electric (GE)
Ratings and Target Price History
Analyst: Jeffrey Sprague
[Graphic omitted reflecting ratings and target price history between January
2001 and June 2003. Graphic highlighted closing prices on dates set forth in
table below. Graphic appears to indicate that the stock was covered during dates
listed in table below.]
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Target Closing
Price Price
# Date Rating (USD) (USD)
- -----------------------------------------------
1: 5 Sep 00 1L *70.00 58.75
2: 6 Aug 01 1L *60.00 41.39
3: 17 Sep 01 1L *50.00 35.15
4: 27 Jun 02 1L *40.00 29.90
5: 13 Aug 02 1L *38.00 30.95
6: 6 Sep 02 Stock rating system changed
7: 6 Sep 02 1L 38.00 28.30
8: 26 Sep 02 1L *32.00 26.39
9: 30 Sep 02 1L 32.00 24.65
10: 20 Nov 02 *1M *30.00 24.80
11: 5 Jun 03 1M *35.00 29.78
- -----------------------------------------------
*Indicates change.
Chart current as of 14 June 2003
See "Important Disclosures" at the end of this report for
a description of the firm's current and former rating systems
A seat on the advisory board of General Electric is held by one or more
directors or employees of Citigroup Global Markets Inc. or its affiliates.
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Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of
any class of common equity securities of General Electric.
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Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has
acted as manager or co-manager of a public offering of securities of General
Electric.
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Citigroup Global Markets Inc. or its affiliates has received compensation for
investment banking services provided within the past 12 months from General
Electric.
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Citigroup Global Markets Inc. or its affiliates expects to receive or intends to
seek, within the next three months, compensation for investment banking services
from General Electric.
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Analysts' compensation is determined based upon activities and services intended
to benefit the investor clients of Citigroup Global Markets Inc. and its
affiliates ("the Firm"). Like all Firm employees, analysts receive compensation
that is impacted by overall firm profitability, which includes revenues from,
among other business units, the Private Client Division, Institutional Equities,
and Investment Banking.
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The Firm is a market maker in the publicly traded equity securities of General
Electric.
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SMITH BARNEY EQUITY RESEARCH RATINGS DISTRIBUTION
DATA CURRENT AS OF 31 MARCH 2003 OUTPERFORM/ IN-LINE/ UNDERPERFORM/
BUY HOLD SELL
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Smith Barney Global Equity
Research Coverage (2576) 34% 41% 25%
% of companies in each rating category that
are investment banking clients 47% 42% 37%
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Multi-industry -- North America (17) 24% 53% 24%
% of companies in each rating category that
are investment banking clients 75% 44% 75%
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As noted in the headings to our ratings-distribution table, for purposes of
NASD/NYSE disclosure rules Smith Barney's Outperform rating most closely
corresponds to a buy recommendation; our In-line rating most closely corresponds
to a hold/neutral rating; and our Underperform rating most closely corresponds
to a sell rating. Because our ratings are based on the relative attractiveness
of a security within an industry or analyst-coverage area, however, Outperform,
In-line, and Underperform cannot be directly equated to buy, hold/neutral, and
sell categories. Accordingly, your decision to buy or sell a security should be
based upon your personal investment objectives and only after evaluating the
stock's expected relative performance and risk.
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Guide To Investment Ratings: Smith Barney's stock ratings are based upon
expected performance over the next 12 to 18 months relative to the analyst's
industry coverage universe. An Outperform (1) rating indicates that we expect
the stock to outperform the analyst's industry coverage universe over the coming
12-18 months. An In-line (2) rating indicates that we expect the stock to
perform approximately in line with the analyst's coverage universe. An
Underperform (3) rating indicates that we expect the stock to underperform the
analyst's coverage universe. In emerging markets, the same ratings
classifications are used, but the stocks are rated based upon expected
performance relative to the primary market index in the region or country. Our
complementary Risk rating system takes into account predictability of financial
results and stock price volatility. L (Low Risk): high predictability of
financial results and low volatility; M (Medium Risk): moderate predictability
of financial results and moderate volatility; H (High Risk): low predictability
of financial results and high volatility; S (Speculative): exceptionally low
predictability of financial results and highest risk and volatility. Risk
ratings for Asia Pacific are determined by a quantitative screen which
classifies stocks into four risk categories: Low Risk, Medium Risk, High Risk,
and
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Speculative Risk. In addition, in the major markets our Industry rating system
is based on each analyst's evaluation of their industry coverage relative to the
primary market index in their region. The industry ratings are Overweight: we
expect this industry to perform better than the primary index for the region in
the next 12-18 months; Marketweight: we expect the industry to perform
approximately in line with the primary index for the region in the next 12-18
months; and Underweight: we expect the industry to perform worse than the
primary market index for the region in the next 12-18 months.
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General Electric is rated relative to a universe of Multi-industry (North
America) stocks that comprises the following companies: American Standard,
Cooper Industries, Crane Co., Danaher Corp., Emerson, General Electric,
Honeywell International, Hubbell Incorporated, ITT Industries, Maytag
Corporation, Rockwell Automation, Roper Industries, SPX Corporation, Textron,
The 3M Company, Tyco International Ltd. and Whirlpool Corporation.
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Prior to September 9, 2002, the Firm's stock rating system was based upon the
expected total return over the next 12 to 18 months. The total return required
for a given rating depended on the degree of risk in a stock (the higher the
risk, the higher the required return). A Buy (1) rating indicated an expected
total return ranging from +15% or greater for a low-risk stock to +30% or
greater for a speculative stock. An Outperform (2) rating indicated an expected
total return ranging from +5% to +15% (low-risk) to +10% to +30% (speculative).
A Neutral (3) rating indicated an expected total return ranging from -5% to +5%
(low-risk) to -10% to +10% (speculative). An Underperform (4) rating indicated
an expected total return ranging from -5% to -15% (low-risk) to -10% to -20%
(speculative). A Sell (5) rating indicated an expected total return ranging from
- -15% or worse (low-risk) to -20% or worse (speculative). The Risk ratings were
the same as in the current system.
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OTHER DISCLOSURES
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affiliates receive compensation for those non-investment-banking services from
such corporations.
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maker, the Firm usually provides bids and offers and may act as principal in
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- --------------------------------------------------------------------------------
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