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Nov. 21, 2017, 6:41 a.m. EST

How to avoid the next GE — and find industrial winners of the future

Sales, margins and returns on invested capital tell the story

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By Philip van Doorn, MarketWatch


Bloomberg News
General Electric is the only Dow stock to post a decline over 10 years.

General Electric Co.’s decline has been dramatic. The industrial conglomerate was co-founded by inventor Thomas Edison and banker J.P. Morgan, among others, and its stock has been on the Dow Jones Industrial Index since 1896, the longest of any company.

But 2017 has been painful, perhaps even more so than during the financial meltdown almost a decade ago.

GE /zigman2/quotes/208495069/composite GE -0.88%  announced a 50% decrease to its dividend Monday, and Chief Executive Officer John Flannery has cut in half estimated 2018 adjusted earnings per share.

The company’s stock is down 40% this year.

So you might be asking yourself, how do I avoid the next GE — and how do I find an industrial company that can thrive amid a tectonic shift in technology?

A review of company financial reports and long-term metrics raises red flags and highlights opportunities for investors.

Read: There’s still some good at GE — but much more bad and ugly

Sales

How could an investor have known there were major problems at GE? If we were to look only at sales over the past year, the story wasn’t inspiring, but it didn’t look like the end of the world either. Here are the 30 stocks in the Dow Jones Industrial average /zigman2/quotes/210598065/realtime DJIA -0.95% , ranked by how much their sales for the past 12 reported months have increased from the year-earlier 12-month period:

Company Ticker Sales - past 12 months ($mil) Sales - year-earlier 12-month period ($mil) Change in sales Gross margin - past 12 months Gross margin - year-earlier 12-month period Total return - 12 months
Visa Inc. Class A /zigman2/quotes/203660239/composite V $18,358 $15,082 22% 79.28% 78.35% 38%
DowDuPont Inc. $55,312 $46,579 19% 20.58% 23.21% 33%
Chevron Corp. /zigman2/quotes/205871374/composite CVX $128,428 $108,281 19% 13.97% 6.87% 13%
Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS $40,417 $35,317 14% N/A N/A 21%
J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM $112,614 $98,873 14% N/A N/A 30%
Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM $222,508 $196,866 13% 21.91% 20.49% -1%
UnitedHealth Group Inc. /zigman2/quotes/210453738/composite UNH $196,621 $180,947 9% N/A N/A 47%
Microsoft Corp. /zigman2/quotes/207732364/composite MSFT $93,444 $86,278 8% 62.91% 61.27% 46%
Intel Corp. /zigman2/quotes/203649727/composite INTC $62,082 $57,927 7% 61.70% 61.16% 36%
Apple Inc. /zigman2/quotes/202934861/composite AAPL $228,577 $214,226 7% 36.93% 38.61% 65%
Home Depot Inc. /zigman2/quotes/208081807/composite HD $97,356 $92,033 6% 32.29% 32.29% 30%
Travelers Cos. /zigman2/quotes/206313935/composite TRV $28,659 $27,161 6% N/A N/A 27%
Caterpillar Inc. /zigman2/quotes/203434128/composite CAT $42,140 $39,993 5% 28.34% 26.48% 50%
Johnson & Johnson /zigman2/quotes/201724570/composite JNJ $74,413 $71,655 4% 68.54% 69.63% 20%
Nike Inc. Class B /zigman2/quotes/203439053/composite NKE $34,294 $33,043 4% 43.44% 44.60% 13%
United Technologies Corp. /zigman2/quotes/203237915/composite UTX $58,802 $57,024 3% 27.11% 27.56% 12%
3M Co. /zigman2/quotes/205029460/composite MMM $30,996 $30,078 3% 49.72% 49.43% 34%
Wal-Mart Stores Inc. /zigman2/quotes/207374728/composite WMT $489,926 $483,298 1% 25.61% 25.41% 31%
General Electric Co. /zigman2/quotes/208495069/composite GE $120,343 $119,974 0% 26.78% 28.66% -30%
Merk & Co. /zigman2/quotes/209956077/composite MRK $39,648 $39,655 0% 68.58% 64.91% -12%
Procter & Gamble Co. /zigman2/quotes/202894679/composite PG $65,193 $65,290 0% 50.51% 50.41% 10%
Walt Disney Co. /zigman2/quotes/203410047/composite DIS $54,975 $55,368 -1% 39.53% 41.38% 12%
Pfizer Inc. /zigman2/quotes/202877789/composite PFE $52,470 $53,244 -1% 70.00% 69.64% 9%
International Business Machines Corp. /zigman2/quotes/203856914/composite IBM $78,367 $80,207 -2% 45.43% 47.68% -3%
Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO $48,005 $49,247 -3% 64.00% 63.45% 14%
American Express Co. /zigman2/quotes/203805826/composite AXP $34,686 $35,644 -3% 72.89% 76.12% 36%
Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ $124,419 $127,894 -3% 45.97% 47.03% 1%
Boeing Co. /zigman2/quotes/208579720/composite BA $91,310 $94,858 -4% 17.75% 13.59% 82%
McDonald’s Corp. /zigman2/quotes/203508018/composite MCD $23,509 $24,934 -6% 44.72% 40.72% 49%
Coca-Cola Co. /zigman2/quotes/209159848/composite KO $36,985 $42,069 -12% 61.13% 59.98% 18%
Source: FactSet

GE’s sales were up slightly, and the gross margin was down significantly — not a good sign.

Among nine companies suffering sales declines of at least 1%, five improved their gross margins.

GE was, by far, the worst stock performer among the Dow 30 over the past 12 months. That is not only because of the disastrous information that has come to light recently. It also reflects investors’ loss of patience after years of disappointing financial performance under Jeff Immelt, who was replaced in August.

ROIC

Return on invested capital (ROIC), a company’s earnings divided by total equity and long-term debt, is a measure of how effective a company’s management is at deploying capital, and comparisons are most meaningful within industries. Banks, for example, tend to have lower ROIC than industrial companies, because they are highly leveraged.

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