Exhibit N
LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
June 23, 2003
United States
Industrial
Electrical Equipment
Robert T. Cornell
1.212.526.2498
rcornell@lehman.com
GENERAL ELECTRIC (GE - $30.01) 2-EQUAL WEIGHT
Company Update
What We Learned At GE`s Analyst Meeting
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INVESTMENT CONCLUSION
* Look For Modest EPS Growth in 2004
SUMMARY
* GE reiterated $1.55-$1.70 EPS guidance for 2003, but indicated it will
narrow the range at the 2Q earnings call on July 11. When they do, we look
for the top end of the range to come down to $1.65, with the low end
maintained at $1.55. We`re sticking to our $1.55 estimate.
* At the meeting, GE highlighted three of its new growth platforms: Water
Technology, Security & Sensors, and Healthcare IT. GE estimates these new
markets are growing at 3x GDP. We calculate a business development program
in 2004 could dilute EPS by approximately $0.03+.
* We were impressed with the potential of these new growth platforms, and
think investors might well continue to appreciate GE`s efforts to evolve
towards a premium growth technology and services company.
* We maintain our 2-Equal weight rating and $35 price target.
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EPS (FY Dec)
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2002 2003 2004 % Change
Actual Old New St. Est Old New St. Est 2003 2004
1Q 0.35 0.32A 0.32A 0.32A NA NA 0.38E (9) NA
2Q 0.44 0.38E 0.38E 0.38E NA NA 0.44E (14) NA
3Q 0.41 0.39E 0.39E 0.43E NA NA 0.45E (5) NA
4Q 0.31 0.46E 0.46E 0.49E NA NA 0.53E 48 NA
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Year 1.51 1.55E 1.55E 1.61E 1.70E 1.70E 1.76E 3 10
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P/E 19.4 17.7
MARKET DATA FINANCIAL SUMMARY
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Market Cap 298029.3M Revenue FY03 134B
Shares Outstanding (Mil) 9931.0 Five-Year EPS CAGR 14.00
Float 9890 Return on Equity 20%
Dividend Yield 2.53% Current BVPS 6.38
Convertible No Debt To Capital 81%
52 wk Range 32.98 - 21.30
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Stock Rating: Target:
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New: 2-Equal weight New: 35.00
Old: 2-Equal weight Old: 35.00
Sector View:1-Positive
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STOCK OVERVIEW
[Graphic omitted showing volume and stock price from June 2002 to June 2003]
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INVESTMENT COMMENT: GE`s stock has had a nice run this year. Our question
is: where do we go from here? GE historically outperforms the market in
anticipation of a recovery. That has been true so far this year and may well
prove true for a while further. Characteristically, though, once the recovery
actually gets going, investors search for companies with better than market
growth and the potential for upside surprises. Our current FY04 EPS growth
estimate for GE of around 10% is in fact the lowest in the group. Moreover,
right now GE is in a period of transition evolving towards a technology and
services company. That could very well result in a company capable of
sustained double-digit growth through an economic cycle ... as management has
noted ... and such prospects could attract a premium P/E. However, GE`s
strategic moves in this transition could result in diminished EPS growth as
the company exits legacy businesses and builds new technology and services
growth platforms. At a meeting Friday (6/20/03) GE gave an update and some
insight into how some of its newest business platforms are doing. So far the
market has given GE`s plan a vote of confidence. We maintain our 2-Equal
weight rating and $35 price target which represents a 20 P/E on our FY04
estimate of $1.70.
SOME OF OUR THOUGHTS ON THE MEETING
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GUIDANCE STAYS AT $1.55-1.70 ... FOR NOW: Going into the meeting Friday, we
think there was a feeling that GE might alter the EPS guidance ... maybe take
the high end $1.70 in EPS off the $1.55-$1.70 range. Such thinking was prompted
by weak May short-cycle orders. Actually, the company didn`t officially change
guidance, but management did anoint the new `consensus` that popped up over the
last couple of days in the $1.58-$1.59 ballpark. Friday`s implicit message we
think, was that when GE reports earnings on July 11th, the $1.70 goes. We would
make a couple of observations in that regard. We think GE`s EPS forecast for
2003 has been too back-end loaded
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PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 3 AND IMPORTANT DISCLOSURES
BEGINNING ON PAGE 5
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
to begin with. We said before that GE`s first-half EPS run rate on a historical
pattern basis points to a full year `03 EPS of something like $1.52 rather than
$1.70. We suspect that at the end of the day GE may not have been conservative
enough on the economy and the short cycle performance in this year`s 2H. Now the
bad actor is Plastics, but the whole short-cycle expectation, we think, may have
been too aggressive from the start.
STRATEGIC REPOSITIONING COULD RESULT IN ONE-TIME GAINS, DILUTION OF NEAR-TERM
OPERATING EARNINGS: Then there is the issue of the strategic changes that are
under way at GE. Management targeted $1-5 billion of industrial divestitures
and $5-10 billion of dispositions out of GE Capital. Not much has happened so
far this year, but GE said at the meeting the plans for the year were
unchanged. The divestitures are likely to be slow-growth industrial units and
low-return financial businesses (mostly insurance, GE said). If that`s the
case, the impact on operating results could very well be dilutive. How much?
Well if GE were to sell $1.0 billion of earnings for ten times and use the
proceeds to buy earnings at fifteen times, that would dilute EPS by about
$0.035 cents per share. Would investors applaud such a move? Probably so,
if the businesses acquired were higher growth and higher return than those
that were divested.
Then there is the question of gains on these actions. The divestitures are
all businesses GE has had for a while, so it`s reasonable to assume that GE
could get significant EPS gains on the industrial businesses but possibly
some losses on some of the financial services units. The net result of the
industrial and financial dispositions is probably a meaningful gain. In the
"old days," GE would use any meaningful one-time gains to book restructuring
provisions. Now the rules under FASB 146 make such restructuring offsets
much narrower in scope. So the point is that GE`s guidance for 2003 probably
has remained wider than you would think because it might include the
potential strategic moves and the associated one-time gains in the year`s 2H.
WHAT ABOUT 2004?: We estimate that in 2004 GE might have operating EPS growth
in the 5-10% range, excluding the impact of the strategic changes. To begin
with, GE Capital could be about half of earnings and grow at 15%...even if
interest rates are tracking up. Non-Power industrial segments might grow by
$0.05-$0.08, and business development could contribute $0.05. GE has
indicated that pension and Power Systems might each add about $0.05 of
headwind ... a total of $0.10. With regard to the new labor contract, all in it
is a wash, according to management. That foots to about $0.12-$0.15 of EPS
growth in 2004 off the operating base for this year. We are at $1.70 for
2004 before the impact of strategic changes. Remember, a reasonable crack at
the impact to recurring earnings of the plans GE has announced is potential
dilution of $0.03-$0.04 at least when we run the math. And that would be a
first year phenomenon. GE would likely be able to drive margins higher in
acquired businesses over time as discussed below.
BUSINESS DEVELOPMENT IS A CORE COMPETENCY: What did GE say on the business
development front? Actually, little new in the big picture context.
Management emphasized that the platforms GE is building out are part of a
careful process of defining growth opportunities that would be attractive
businesses both near term and 5, 10 or more years down the road. Management
noted again that it had identified some $175 billion of new markets, in which GE
currently has $7 billion in sales. We believe that GE`s new platforms are at
double-digit margins already. GE sees these businesses growing to $12 billion in
2006, with 20% margins and 15%+ROTC ... nice if they can do it. And GE will
probably be adding more platforms in 2004 and 2005 as it completes the strategic
divestitures. Can GE be so successful in its business development effort? Here
is where we came away incrementally impressed on the positive side. GE has the
capability to throw powerful resources at these businesses, including all of
GE`s best practices and the global footprint, too. We also noted that GE can
take these new platforms and get them in front of existing customers, for
example, power plants for the Water business and hospitals for the Security
business.
IMPLICATIONS FOR THE STOCK PRICE: All in, though, the Street is going to
have to buy into the reality that GE probably will be diluting near-term EPS
growth to some degree with this effort and taking down ROTC to somewhat, as
well. The trade-off is a more attractive longer-term growth rate. Is there a
precedent for the Street`s reaction to a company doing this? Actually, we
think there is. Emerson has been going through this evolution for a while,
and the Street has been very forgiving. Bottom line though is that we don`t
think GE`s P/E would rise in the midst of this transition. Yes the organic
growth rate could be seen as improving but we don`t think GE would change its
fundamental long term guidance. That is, a company that can grow 10%+ through
the cycle. So for a while earnings growth might define stock price upside.
DISCUSSION OF WATER, SECURITY AND HEALTHCARE IT PLATFORMS
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PLATFORM SUMMARY
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PLATFORM 2003E GROWTH PATH TO 2006 2006E
OP MARKET GE ACQUI- OP
REVENUE MARGIN GROWTH CAPABILITY SITIONS REVENUE MARGIN
Water Technologies $1.4 ~15% $0.4 $0.4 $0.8 ~$3.0 20%+
Security $1.0 16% $0.5 $0.5 $1.0-2.0 $3.0-4.0+ 20%+
Healthcare IT $1.7 18% $1.0 $0.5 $1.0 $4.0 25%+
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SOURCE: GE
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
GE WATER TECHNOLOGIES TO BE A KEY PLATFORM IN SPECIALTY MATERIALS SEGMENT:
GE defined the on-going evolution of its Specialty Materials business from
four businesses (Silicones, Quartz, Super-abrasives, Specialty Chemicals) to
two multi-billion dollar platforms (Water Technologies, Advanced Materials).
On the Advanced Materials side, GE is limiting investment in Super-Abrasives
and Specialty Chemicals (looking to monetize Specialty Chemicals) and
focusing on Silicones and Quartz as the growth areas. GE expects the
acquisition of OSi Specialties (supplier of specialty silicones) to close in
3Q03 ($450 million+ in annual sales) complementing the existing Silcones
business. For 2004, GE is targeting revenue from Silicones & OSi combined of
$2 billion with operating profit of $300 million based on operating margin
expansion from 10% for Silicones in 2003 to 15% for the combined businesses
in 2004. The main focus though was on the Water Technologies platform.
Let`s take a look.
GE`s Water Technologies platform currently generates $1.4 billion in revenue.
The platform was launched via the 2Q02 acquisition of Betz Dearborn`s
industrial water treatment services business which is now GE Betz and has
$1.1 billion in revenue. The next major building block was the 1Q03
acquisition of Osmonics which currently has $300 million in revenue.
Osmonics manufactures equipment and components for water purification and
fluid filtration, separation, and handling. GE highlighted that water is
integral to virtually every industrial process with industrial sites often
requiring higher water quality than drinking water. Specifically GE has
identified a $40 billion subsegment of the $360 billion Water & Process
market as a target area with potential for 2-3X GDP organic growth, 15% ROTC,
and free cash flow conversion of 150%. Our view is that this is an
attractive market in general but particularly for GE because of its ability
to sell to its large installed base of customers across industries and apply
the GE services model to what is still a more transactions-based business.
GE is targeting revenues for the Water Technologies platform to increase from
$1.4 billion in 2003 to $3.0 billion in 2006 ($400 million from GE
"capability", $400 million from market growth, and $800 million from
acquisitions); operating margin is targeted to go from 15% in 2003 to 20% in
2006.
SECURITY PLATFORM: FROM $0 IN 2001 TO $1 BILLION IN 2003 TO $3-4+ BILLION IN
2006: GE sizes the global security industry at $127 billion, of which GE
targets the $29 billion electronics products segment. This particular
segment grows at 10%+ and allows to have margins of 15%+. GE has no
intention at this point to be a security services company
(monitoring/guard/protection) choosing to focus on the product side. GE
established its presence in the security market in 1Q02 with the acquisition
of Interlogix, which we believe had annual sales of about $700 million at the
time. The platform, named GE Interlogix, was augmented in 4Q02 with the
acquisition of a smaller company Ion Track. In 2003, management expects the
security platform to reach $1 billion sales run rate. In addition to Ion
Track, GE made four other smallish acquisitions in the security space with
combined sales of $100 million. Management is also counting on $160 million
of organic growth in 2003. It appears that within the array of the security
products, GE is especially well positioned in digital video and trace
detection, which are arguably the sweetest spots of the security market right
now. GE has ambitious plans to grow its security business from $1 billion in
2003 to $3-4+ billion in 2006 through a combination of overall market growth,
GE`s incremental organic growth on top of the market, and acquisitions. GE
noted it has about 20 potential acquisition deals in the pipeline. Longer-
term operating margins could top 20%, management believes. Similar to other
newly acquired businesses, GE Interlogix is benefiting from the ability to
leverage GE`s huge customer base. Interlogix has also adopted GE`s voice of
the customer philosophy. Management pointed to a stronger product innovation
culture post-acquisition: 52 scheduled new product launches in 2003 versus 38
in 2002.
HEALTHCARE IT: GREAT CONCEPT, BUT CAN HOSPITALS AFFORD IT? Building off the
already strong Medical Systems business, GE has added acquisitions within the
healthcare IT sector and forged into a $25B industry segment that is expected
to grow at 10-15%. GE plans to integrate its eleven acquisitions in this
sector into a holistic solution that enables data to move with the patient
instead of the other way around. GE estimates that revenues from Healthcare
IT will be $1.7 billion in 2003, growing to $4 billion by 2006. Management
also aims to increase operating margins from around 18% to 25% over the same
time period. GE has shown already that it can effectively increase margins:
in its first year under GE ownership Loral revenues grew 30% and
profitability doubled. GE aims to own the entire information collection,
transmittal and storage process with a paperless, film-less, and wireless
digital solution. We believe GE has a strong customer base in the medical
services market and a reputation for solid technology, but it could still be
a tough sell to hospital CEO`s in the near term. Fiscal pressures from
shrinking reimbursements, new patient safety requirements and overcrowded
facilities have pushed a third of US hospitals into the red. Health systems
are looking for ways to increase productivity and increase clinical efficacy
through more accurate data, but piecemeal investments seem to be the norm.
While the solutions sell makes sense from a technology standpoint, the sales
force will need to create a rock-solid case for hospitals to ante up for an
IT overhaul.
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Analyst Certification:
I, Robert Cornell, hereby certify (1) that the views expressed in this
research note accurately reflect my personal views about any or all of the
subject securities or issuers referred to in this note and (2) no part of my
compensation was, is or will be directly or indirectly related to the
specific recommendations or views expressed in this note.
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
COMPANY DESCRIPTION:
GE is a diversified technology, services and manufacturing company.
COMPANY NAME: DISCLOSURES TICKER PRICE (6/20) RATING
General Electric A,D,E GE 30.01 2-Equal weight
RELATED TICKERS: DISCLOSURES TICKER PRICE (06/19) RATING
Emerson EMR 53.35 1-Overweight
OTHER TEAM MEMBERS:
Yuri Krapivin, CFA 1.212.526.5218 ykrapivi@lehman.com
Shannon O`Callaghan 1.212.526.3204 socallag@lehman.com
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
IMPORTANT DISCLOSURES
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Rating and Price Target Chart: GE
[Graphic omitted reflecting target stock price from June 2000 to June 2003 as
well as closing price and changes based on analyst ratings and changes in
coverage.]
Date Closing Price Rating Price Target
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14-Oct-02 $24.35 $30.00
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27-Sep-02 $24.47 $35.00
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27-Sep-02 $24.47 2-Equal weight
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29-Aug-02 $30.35 $45.00
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Date Closing Price Rating Price Target
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05-Aug-02 $28.30 1-Overweight
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12-Oct-01 $39.00 $50.00
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14-Jul-00 $52.19 $67.00
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FOR EXPLANATION OF RATINGS PLEASE REFER TO THE STOCK RATING KEYS LOCATED AT
THE END OF THIS DOCUMENT
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
IMPORTANT DISCLOSURES:
The analysts responsible for preparing this report have received compensation
based upon various factors including the Firm`s total revenues, a portion of
which is generated by investment banking activities.
A - Lehman Brothers Inc. and/or an affiliate managed or co-managed within the
past 12 months a public offering of securities for this company.
D - Lehman Brothers Inc. and/or an affiliate has received compensation for
investment banking services from the subject company within the past
12 months.
E - Lehman Brothers Inc. and/or an affiliate expects to receive or intends to
seek compensation for investment banking services from the subject company
within the next 3 months.
RISKS WHICH MAY IMPEDE THE ACHIEVEMENT OF THE PRICE TARGET:
GE: GE has noted that it needs short cycle businesses to grow in 2H02 and
in 2003 to meet the double digit earnings growth target. If the economy
weakens, the prospects of such earnings performance might diminish as well.
KEY TO INVESTMENT OPINIONS:
STOCK RATING
- ------------
1-OVERWEIGHT - The stock is expected to outperform the unweighted expected
total return of the industry sector over a 12-month investment horizon.
2-EQUAL WEIGHT - The stock is expected to perform in line with the unweighted
expected total return of the industry sector over a 12-month investment
horizon.
3-UNDERWEIGHT - The stock is expected to underperform the unweighted expected
total return of the industry sector over a 12-month investment horizon.
RS-RATING SUSPENDED - The rating and target price have been suspended
temporarily to comply with applicable regulations and/or firm policies in
certain circumstances including when Lehman Brothers is acting in an advisory
capacity on a merger or strategic transaction involving the company.
SECTOR VIEW
- -----------
1-POSITIVE - sector fundamentals/valuations are improving.
2-NEUTRAL - sector fundamentals/valuations are steady, neither improving nor
deteriorating.
3-NEGATIVE - sector fundamentals/valuations are deteriorating.
STOCK RATINGS FROM FEBRUARY 2001 TO AUGUST 5, 2002 (SECTOR VIEW DID NOT
EXIST):
This is a guide to expected total return (price performance plus dividend)
relative to the total return of the stock`s local market over the next 12
months.
1-STRONG BUY - expected to outperform the market by 15 or more percentage
points.
2-BUY - expected to outperform the market by 5-15 percentage points.
3-MARKET PERFORM - expected to perform in line with the market, plus or minus
5 percentage points.
4-MARKET UNDERPERFORM - expected to underperform the market by 5-15
percentage points.
5-SELL - expected to underperform the market by 15 or more percentage points.
STOCK RATINGS PRIOR TO FEBRUARY 2001 (SECTOR VIEW DID NOT EXIST):
1-BUY - expected to outperform the market by 15 or more percentage points.
2-OUTPERFORM - expected to outperform the market by 5-15 percentage points.
3-NEUTRAL - expected to perform in line with the market, plus or minus 5
percentage points.
4-UNDERPERFORM - expected to underperform the market by 5-15 percentage
points.
5-SELL - expected to underperform the market by 15 or more percentage points.
V-VENTURE - return over multiyear timeframe consistent with venture capital;
should only be held in a well diversified portfolio.
DISTRIBUTION OF RATINGS:
Lehman Brothers Equity Research has 1526 companies under coverage.
34% have been assigned a 1-Overweight rating which, for purposes of mandatory
regulatory disclosures, is classified as a Buy rating, 14% of companies with
this rating are investment banking clients of the Firm.
43% have been assigned a 2-Equal weight rating which, for purposes of
mandatory regulatory disclosures, is classified as a Hold rating, 5% of
companies with this rating are investment banking clients of the Firm.
23% have been assigned a 3-Underweight rating which, for purposes of
mandatory regulatory disclosures, is classified as a Sell rating, 25% of
companies with this rating are investment banking clients of the Firm.
This material has been prepared and/or issued by Lehman Brothers Inc., member
SIPC, and/or one of its affiliates ("Lehman Brothers") and has been approved
by Lehman Brothers International (Europe), regulated by the Financial
Services Authority, in connection with its distribution in the European
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Singapore by Lehman Brothers Inc., Singapore Branch. This material is
distributed in Korea by Lehman Brothers International (Europe) Seoul Branch.
This document is for information purposes only and it should not be regarded
as an offer to sell or as a solicitation of an offer to buy the securities or
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LEHMAN BROTHERS
=================================================================EQUITY RESEARCH
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