No. of Recommendations: 4
Hi Hugo,


Have you tried valuing GE with ValuePro?

The default values gives you a valuation of 7.96 with a stock that trades at 34.72. If you adjust the Equity Risk Premium at 5 then the result is 0 !!!


This brings up another word of caution. A FCF approach to valuing any kind of a bank or financial stock is not a valid way to go. GE owns GE Capital (a major lender and a bank of sorts) and it amounts to a major hunk of the entire business.

Without boring you with details, problems arise with what exactly FCF is with a bank. The standard definition is not correct.

Also, since at the end of the DCF calculation net debt is subtracted a bank that has a lot of deposits (which are reported as debt on the balnace sheet) will be given a very small value. This is not a realistic end result.

I find that a dividend discount model (DDM) is more appropriate for valuing shares of banks.

For GE, being the huge conglomerate it is, an accurate valuation would need to take a sum of the parts approach.

So, don't use Valuepro for any kind of financial stock (banks, insurance companies or GE).

Rich
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