GE's Success Leads to Downgrade (Update 1)

Tickers in this article: EMR GE MMM UTX

Corrected to show that GE Capital's earnings from continuing operations were $7.401 billion in during 2012, not $6.215 billion, and that GE Capital's earnings from continuing operations during 2011 were $6.584 billion, and not $6.510 billion.

NEW YORK ( TheStreet) -- General Electric (GE) has made tremendous progress over the past few years and the increase in the company's share price has led to a downgrade by Nomura Securities analyst Shannon O'Callaghan.

O'Callaghan on Monday lowered his rating on GE to "neutral" from a "buy," while keeping his price target for the shares at $24.00 and saying in a report that the stock's price-to-earnings ratio is now "in line with premier industrial peers despite GE still getting 40-45% of its earnings from GE Capital."

GE's stock closed at $23.62 Monday, returning 13% year-to-date, following a 21% return during 2011. The shares trade for 12.8 times the consensus 2014 earnings estimate of $1.85. The consensus 2013 EPS estimate is $1.67.

GE in January reported 2012 operating earnings of $16.065 billion, increasing from $14.915 billion in 2011. Operating earnings per share -- excluding the effects of preferred stock redemptions in 2011 -- grew to $1.52 a share in 2012 from $1.38 the previous year.

GE Capital -- the company's finance arm that was much maligned during the financial crisis -- had earnings from continuing operations of $7.401 billion in 2012, increasing from $6.584 billion the previous year. With the finance unit continuing to free up capital in line with CEO Jeff Immelt's strategy to right-size the balance sheet, GE Capital paid dividends to the parent company totaling $6.4 billion last year.

With GE Capital returning to being a cash cow for the parent, General Electric repurchased $5.2 billion worth of common shares in 2012, and raised the quarterly dividend on common shares by $0.02 to the current payout of $0.19, for an attractive dividend yield of 3.20%.

In addition to the release of excess capital from GE Capital and the parent company's capital return to investors, O'Callaghan said GE's progress over the past year has included a "target for 65% industrial earnings mix by 2015 (ultimately 70%)."

"We applaud these positives," he wrote, "but we think they are now reflected in the valuation, adjusting for accounting differences."

GE's price multiple of over 14 times the 2013 consensus "may look like a discount to peers at 15.5x, but we estimate that the non-operating pension expense that is excluded from consensus and our estimates for GE has increased from $0.06 in 2011 to $0.16 in 2013," O'Callaghan wrote.

On a "comparison GAAP pension basis," O'Callaghan estimated that GE's stock trades for 15.7 times 2013 earnings, putting the stock at a "slight premium" to Emerson Electric (EMR) , United Technologies (UTX) and 3M(MMM) ," according to O'Callaghan.