Two Underappreciated American Icons

 | May 10, 2013 | 11:00 AM EDT
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Value is getting harder to find in a market that has been in continuous rally mode for seven months. One area where I still see value is a couple of American manufacturing icons that do not get the coverage that, say, (CRM) or Tesla (TSLA) receive despite their small sizes. Like the American economy and public, these companies have gone through changes over the past five years but are slowly emerging stronger than ever.

General Electric (GE) has done a solid job rightsizing its businesses since emerging from the financial crisis. The percentage of revenues and profits contributed by GE Capital has been reduced dramatically. That part of the business has also shrunken its balance sheet substantially. This has resulted in less volatility and risk in GE's earnings. In addition, it sold off its media businesses for some $17 billion recently. With some of the proceeds, the company increased its footprint in the energy sector by picking up Lufkin Industries (LUFK) for about $3.3 billion.

As the result of these changes, GE consists mainly of big ticket medical and industrial (e.g., jet engines) goods, as well as growing exposure to domestic energy production, which I believe it will expand further via other acquisitions. This makes GE a good proxy for continued faster growth in developing world -- China and India are going to buy a lot of jets and medical equipment over the next two decades as their middle class expands. I also look for GE to continue to be a bigger player in oil services, which is also growing nicely. Finally, the company should benefit greatly as Europe stabilizes and eventually returns to growth.

The stock provides solid long-term value at just under $23 per share. GE is priced at 12.5x 2014's projected earnings. It also yields 3.3% and has nearly doubled its dividend payouts since coming out of the financial crisis.

Leading U.S. automaker General Motors (GM) had a more perilous journey through the financial crisis than GE, as the company had to seek bankruptcy protection. It emerged from that process with a substantially lower cost structure. It has also benefitted from a robust domestic auto market that should see more than 15 million vehicles purchased in 2013. More important, truck sales are ramping up as the housing and construction markets recover. This is critical as automakers can make up to 10 times more profit from a truck than a small or midsized car.

In addition, GM is a huge backdoor play on growth in China. It recently announced that it will expand capacity another 30% by building four new plants. This will give GM the capacity to build 5 million vehicles annually by 2015. The Buick brand is a longtime Chinese favorite. GM sold more than 260,000 vehicles in China in April, up 15% from a year earlier. The company is well positioned to take advantage of the enmity that is escalating between China and Japan and should pick up share as a result.

At just above $31 per share, the stock sells for a little more than 7x 2014's projected earnings, and the company has grown operating cash flow by better than 50% over the last two completed fiscal years. The Treasury Department should sell its remaining stake in the company in the near future. This should remove any remaining stigma from the company's bankruptcy (i.e., "Government" Motors), and I would look for the company to reinstate some sort of dividend soon thereafter, providing growth and earnings remain strong.

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