EX-99.L 14 c28573_ex-l.txt EXHIBIT L EQUITY RESEARCH [BANC OF AMERICA SECURITIES LOGO] UNITED STATES Research Brief June 22, 2003 Electrical Equipment ------------------------------------------ GENERAL ELECTRIC CO. Going for Growth (GE): $30.01 BUY Volatility: Low 12-Month Target: $35.00 Total Return to Target: 19.2% Nicole M. Parent (212) 583-8047 nparent@bofasecurities.com Paul A. Jacoby (212) 847-5715 paul.jacoby@bofasecurities.com * Co. confirmed guidance of $0.37-0.39 for Q2 & $1.55-1.70 for FY03. We remain at $0.37 & $1.58, respectively. Q2 has come in on plan with NBC & Power slightly better and Plastics & Equipment Mgmt slightly worse. Short cycle orders are expected to be up 0-5% in Q2 with Plastics down ~15% (flat sequentially) vs. tough comps. Co. reviewed 3 of its 6 growth platforms. * Water Technologies is $1.4B platform expected to grow 20%+ annually. Recently acquired Betz & Osmonics address $40B water & process market growing at 2-3x GDP. Biz service model is compelling with 80% of sales recurring, 1/3 of which are annual contracts. * Interlogix (security) relies on leveraging strength in software/ IT. FY03 sales est. ~$1B (+30%), op margin 16%. Co. expects $3-4B+ sales by '06 (~50% CAGR) due to tech investment, leveraging GE global distribution & acq. Intelligent Video represents big growth opportunity. Acq. in Fire likely. * Healthcare IT is $1.7B platform growing 30%+ annually. Biz is ~60% data acq. devices & networking, & 40% clinical IT. Goal is to create digital hospital (paperless/filmless/wireless). Mgmt targeting oppty in OR, ER, ICU. * Valuation and Target Price Analysis Reiterate Buy Rating. We do see room for the shares to move higher from current prices particularly as the company delivers on realistic plans for FY03/FY04. -------------------------------------------------------------------------------- SECTOR VIEW: We favor stocks with stable or improving fundamentals and solid free cash flow that are leveraged to the domestic industrial recovery. SECTOR PRICE APPRECIATION POTENTIAL (MEDIAN OF TARGET PRICE): 2% -------------------------------------------------------------------------------- Top Picks Ticker Rating Price Target ------ ------ ----- ------ DHR B $70.36 $78.00 GE B $30.01 $35.00 Least Favorites NONE NONE B = Buy, N = Neutral, S = Sell, * = New Pick ------------------------------------------------------------------------------- ------------------------------- ----------------------------------------- Company Data FYE Dec 2002 A 2003 E 2004 E ------------------------------- ----------------------------------------- 52-Week Range $33-21 EPS Secular Growth (EPS) 17% Q1 (Mar) $0.35 $0.32 A Market Cap. $301.0 BB Q2 (Jun) 0.44 0.37 Avg. Daily Vol. 20,116,265 Q3 (Sep) 0.41 0.41 Debt/Cap. (3/03) 6.0% Q4 (Dec) 0.31 0.48 Est. Dividend/Yield $0.76/2.5% ---------------------------------------- ------------------------------- Fiscal Year $1.51 $1.58 $1.70 ---------------------------------------- ------------------------------- ---------------------------------------- Index Data Calendar Yr $1.51 $1.58 $1.70 ------------------------------- ---------------------------------------- DJIA 9201 P/E 19.9 19.0 17.7 S&P 500 996 P/E/G 117% 112% 104% ------------------------------------------------------------------------------- Please see the important disclosures and analyst certification on page 7 of this report. Investors should assume that Banc of America Securities is seeking or will seek investment banking or other business from companies rated in this report. BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- Company Confirms Q2 & '03 Guidance -------------------------------------------------------------------------------- GE (GE, $30.01, Buy) management hosted an analyst meeting on June 20 in New York City featuring three of its new growth platforms-Water Technologies, Interlogix (security), and Healthcare IT. Management confirmed its prior guidance range of $0.37-0.39 for Q2 and $1.55-1.70 for FY03. We remain at $0.37 and $1.58 for Q2 and FY03, respectively. The company is expected to narrow its guidance range on its Q2 conference call July 11. Q2 appears to be coming in on plan with NBC and Power slightly better than expected and Plastics and Equipment Management slightly worse. Short cycle orders are expected to be up 0-5% for the quarter with Plastics down ~15% against difficult comps (orders were up 14% in Q202 on significant inventory replenishment), but flat sequentially. Excluding Plastics and the impact of acquisitions and F/X, short cycle orders are expected to be flat in Q2. (Please see our GE orders note dated 6/18/03 for a more detailed review of short cycle orders, especially Plastics.) Impact from SARS is diminishing, but its effects have been felt to a limited extent at Aircraft Engines and Plastics. SARS impact was also felt at Medical where revenue is expected to come in ~$30mm light in Q2 reflecting travel and sourcing disruption as well as mix shift to lower margin imaging like radiology which is favored in treatment of the disease. NBC '03/'04 upfront advertising revenue was a record $4.8B with the network taking impressive share of advertising spend (32% share of primetime spend at networks, 50%+ of both late night and early AM). Scatter pricing is up an estimated 25% in Q2. The '10 & '12 Olympics win not only includes comprehensive media rights (not just TV) and enhanced GE sponsorship of the event, but also represents $35-40B in total infrastructure spend in the host cities for which GE is considered a preferred supplier. At Capital, gross consumer delinquencies (30-day delinquencies before retailer risk-sharing on private-label credit cards) increased to 5.82% in May vs. 5.27% last year, but ticked down from 5.84% at the end of Q1. Commercial delinquencies were 1.90% in May, down from 2.37% year ago and 1.92% in March. Management is relatively pleased with the formal labor agreement reached on June 18 between GE and union leadership which employees are expected to ratify by June 24. GE's New Growth Platforms -------------------------------------------------------------------------------- As GE looks to renew its business portfolio it is placing a lot of emphasis on building-out new growth platforms. Before embarking on the ambitious program of acquiring new platforms during the past 12-18 months, senior management performed a rigorous analysis to identify attractive new growth areas. The criteria for the businesses include: large infrastructure businesses with a significant technology component, high growth rates with large addressable markets, high contribution margin rates and low capital intensity, the ability to maintain customer contact (not reliant on distribution), and opportunity for service and financing components. The best ideas to come out of the screening process so far have been water quality, security & sensors and healthcare IT (each discussed below), as well as Hispanic media (Telemundo), oil & gas (we think GE would buy solid product and service companies up to $2B in revenues with margin expansion opportunities) and domestic consumer finance. Management has indicated that it intends to be disciplined with respect to future acquisition candidates, to target returns of 15% by year 5, and to focus on companies with revenue in the $100mm to $2B range. (At the same time the company will also be looking to sell pieces of lower return businesses both in Industrial ($1-5B) and Capital ($5-10B)). The company is on track to meet its goal of $8-10B in growth capital available this year ($4B at Industrial, $4-6B at Capital), and '04 is expected to be at a similar level. Nicole M. Parent (212) 583-8047 General Electric Co. 1 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- Below we discuss GE's new growth platforms that were presented at the analyst meeting: Water Technologies -------------------------------------------------------------------------------- GE Specialty Materials CEO Bill Woodburn and GE Water Technologies CEO George Oliver provided an overview of the business. Water Technologies is a leading provider of engineered chemical treatment of water and industrial and commercial process systems ($1.1B annual revenue, capabilities acquired with Betz in Q202), as well as a leading supplier of mechanical separation equipment for water purification and fluid filtration ($300mm revenue, capabilities acquired with Osmonics in Q103). Acquisition integration is proceeding smoothly. Compared to the period prior to being acquired, Betz customer churn has declined to 3% from 10%, sales rep turnover has declined to 2% from 10% and growth has increased to 5%+ from (4%). Operating profit margin is expected to be ~15% in '03, increasing to 20% by '06. GE's water businesses address fast growing segments of a $40B piece of the $360B global water & process market. Target segments include chemicals & services ($11B market), filtration consumables ($9B), modular equipment ($8B), as well as opportunities in waste & environmental services, smart & contractual services, custom equipment and maintenance. In aggregate, these businesses are growing at 2-3x GDP, have a high return on capital (15%+), and play to GE's strengths in technology, distribution and services. GE expects to leverage its global distribution capabilities and strong customer relationships to grow core revenue while it adds related businesses to fuel expected 21% annual growth- half organic / half acquired-through '06 (to $3.0B). GE recently had >$1B in the Water acquisition pipeline focusing on areas like services, water process and process chemistry. The business' service model is compelling with 80% of sales recurring, one- third of which are annual contracts. George Oliver (former VP & GM, GE Engine Services) is applying his GEAE experience to the Water platform where he is focusing the segment on GE's competitive strengths by further enhancing the service delivery component of the business. GE is also placing more of a focus on technological innovation-capX as a percentage of sales is expected to be ~4% in '03 and to increase to 6% in '04 vs. an estimated 2% at Betz prior to the acquisition which was not making the investments needed to spur growth. Heavy industry (metals & mining, petrochemical, hydrocarbon processing) represents the largest end market served (40-50% of sales). We estimate that power customers represent ~15% of sales. High purity process industries (food & beverage, pharma & medical) activity is being driven by regulatory changes. Middle market commercial and institutional business requires fairly narrow service requirements but add up to a significant portion of the business in aggregate. Geographically, revenue is ~67% in the Americas, 25% in Europe and 8% in Asia. The opportunity in Asia is driven by massive infrastructure build- out opportunities in China, which management estimates is a $500mm market growing at 15-20% annually. On the competitive landscape, GE is the #2 player in water management chemicals and services, with a ~15% share. Suez's Ondeo- Nalco is the global leader with ~25% of the market and Ashland's Drew Industrial business is #3. Other major competitors include ChemTreat ($150mm sales), Buckman Laboratories ($235mm sales in water treatment, mostly for pulp & paper) and Baker Petrolite (serves primarily refining & petrochemical plants). The remainder of the market is fairly fragmented. There is an excellent article in the May 21/28 issue of Chemical Week regarding the water treatment industry. If you would like a copy of the article, please contact us. General Electric Co. Nicole M. Parent (212) 583-8047 2 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- Interlogix (Security) -------------------------------------------------------------------------------- GE Industrial Systems CEO Lloyd Trotter and GE Interlogix CEO Ken Boyda provided an overview of the GE Interlogix security business. Interlogix is targeting the $32B security equipment market but has no plans to enter the $24B security monitoring market. Interlogix' strategy relies on leveraging the company's strength in advanced technologies (digital video, wireless components) and software in order to develop complete enterprise IT/software security solutions for customers. (See our BAS FIRE & SECURITY ROUNDTABLE note dated 5/14/03 for more industry & competitor details). The security electronic equipment market is growing 10%+ annually (vs. ~5% for monitoring). GE sizes the market opportunities for Interlogix as follows: Intrusion ($9B market), Fire Services ($5B), Access Control ($4B), Video Surveillance ($4B), Asset Surveillance ($4B), Inspection/Detection ($1-2B) and All Other ($4-5B). Interlogix is expected to have sales of ~$1B in FY03, up 30% from $700mm in 2002. Company sales by product category include Intrusion (39% of sales), Video Surveillance (19%), Inspection/Detection (14%), Access Controls (10%), Fire (7%) and Other (11%). Interlogix sales by end user are ~33% residential, 30% commercial, 20% institutional (government, non governmental organizations, universities, hospitals) and 17% industrial. ADT is Interlogix' #1 customer. Operating margin is estimated to be ~16%-Video, Inspection and Other segments enjoy operating margins of 20-25% while the rest have estimated margins of 10-15%. Interlogix appears to be benefiting from GE corporate resources in many respects-research centers, globalization, technology from other platforms like Medical, Power, Industrial; productivity initiatives, as well as acquisition and integration expertise. (Interlogix is itself a roll-up of 32 security companies that was still in the process of integrating its many pieces when GE bought it in Q102.) We expect the GE brand and distribution capability will be a major boon for the organization as it moves aggressively to produce a more robust offering. Management expects $3-4B+ sales by '06 (~50% CAGR) driven by technology investments, leveraging GE global distribution and acquisitions. Operating margin is forecast to exceed 20% by '06. On the acquisition front, the company has recently been working on 4 deals that would add a total of ~$1B in annual revenue. In addition to recent acquisitions in networked video (International Fiber) and advanced sensors (Ion Track) we would not be surprised to see Interlogix pursue a fairly large player in fire safety given Interlogix' relatively low exposure to that segment. Company is also currently focusing R&D spend and/or exploring acquisition targets in HVAC controls, biometrics, standalone keypads and card readers & badges. Company spends ~5% of annual sales on R&D in the Intrusion segment (other segment figures not available). Intelligent video represents one of the company's biggest growth opportunities and is expected to grow 28% in 2003. The total digital video market is expected to be $550mm in 2003 vs. $3.2B for more traditional analog technology. Digital market is expected to grow almost 7x to $3.8B by 2006 while analog is forecast to shrink to $2.5B, and Interlogix is well-positioned to take advantage of this technology upgrade. Digital video offers significant savings in media storage costs and maintenance & repair vs. traditional VCR technology. Digital equipment is also more reliable and offers greater functionality (e.g., to search, scan, zoom images). Wireless Intrusion technology is one of Interlogix' key strengths, and it is one of the fastest growing segments in Intrusion. Since ~40% of residential installations in the U.S. contain wireless components Interlogix' share represents a good installed base to add-on other products and services or the potential to upgrade to more advanced solutions. Interlogix is also making use of trace detection Nicole M. Parent (212) 583-8047 General Electric Co. 3 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- technology acquired with Ion Track earlier this year. Interlogix currently addresses the $1B trace detection market which is growing 13-15% annually but plans to expand its market to include the $1-2B bulk detection (for luggage, shipping containers) which is growing 15% annually. The business would make use of Medical Systems CT and Gamma camera imaging technologies. Healthcare IT -------------------------------------------------------------------------------- GE Medical Systems CEO Joe Hogan provided an overview of the GE Healthcare IT growth platform. GE Healthcare IT is a $1.7B platform growing 30%+ annually. It is relatively further along the platform development progression than Water or Interlogix and is well into its build-out phase (having already passed through define & launch, and reshape phases). Management believes that the digital data revolution in healthcare is likely to turn the corner into widespread availability and use within the next few years, and GE has invested heavily in businesses to help lead the charge. Clinical information systems are aiming to remove the media that healthcare information currently travels on in order to create a digital hospital that is paperless, filmless and wireless. A recent Banc of America Securities Hospital CIO Survey points to accelerated healthcare IT market growth of approximately 12% in 2003 versus 10% in 2002 (and 5-7% in 2001). Growth in hospital IT spending is being driven by continued improvement in hospitals' financial condition and a clear focus by hospitals on clinical workflow efficiency and preventable medical errors, although other capital spending initiatives (facility expansion/ improvements, capital equipment) frequently get a higher priority. Cost reduction strategies as well as slowly improving managed care pricing and reimbursement rate give-backs are helping to drive IT sales. IT operating expenses at hospitals remain relatively small compared to other industries--spending on IT represents 2.7% of a typical hospital budget versus the corporate America average of 5-8% and the still higher average (10-12%) in transaction intensive industries like financial services. Clinical system installations (both large and expensive) should be among the leading drivers of growth, expected to be up 20% in 2003. Leading IT spending priorities (in order) have been identified as computerized physician order entry (CPOE) systems, handhelds for clinicians, PACS (Picture Archiving Communication System), ambulatory medical records, clinical data repositories, point-of-care computers and surgical information systems. GE's major healthcare IT competitors include Meditech, 3M Health Information Systems, SoftMed Systems, Misys/Sunquest, Cerner, Eclipsys, IDX Systems, McKesson and Siemens. GE Healthcare IT consists of data acquisition devices ($960mm '03E sales, +11% y/y), and networking and clinical IT ($540mm, +30% y/y). Devices are integrating and making accessible patient information at bedside or remotely. Opportunities are especially plentiful in the operating room. GEMS aims to capitalize on the trend to move beyond IT investment in peripheral medical functions of admissions, billing and hospital administration, by focusing on opportunities in the mission-critical, clinical activities (operating room, emergency room, intensive care unit). GEMS sees opportunities in further building out the platform into adjacent areas of the $25B healthcare IT market, especially in pharmacy IT and physician order entry and scheduling. The recent Millbrook acquisition (physician office administrative IT) is a good example. GEMS' Centricity PACS (Picture Archiving and Communication Systems) and RIS (Radiology Information System) technology are market leaders. Currently fewer than 10% of healthcare institutions use PACS and fewer than 20% of the ~6,500 U.S. hospitals use PACS on an enterprisewide basis. This represents a huge opportunity. GE PACS revenue is expected General Electric Co. Nicole M. Parent (212) 583-8047 4 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- to reach $500mm (+25%) in '03. We should note that the competition may not be far behind. Philips is positioning to be a big player in digital image management systems with >1,000 systems installed, 70% of which are in the U.S., but we believe the company may be having some difficulty integrating some of its recent acquisitions. GEMS is trying to close its deal to purchase Instrumentarium, a leader in anesthesia and critical care patient monitoring systems used principally in operating rooms and intensive care units. The vast majority (80-90%) of Instrumentarium that revolves around patient monitoring will be folded into GE Healthcare IT. This includes the major Instrumentarium critical care brands Datex-Ohmeda (anesthesia), Spacelabs (patient monitors and IT, acquired in September) and Deio (operating room IT). The Instrumentarium deal has received a second request by both the European Union and U.S. Department of Justice. Furthermore, it has recently been reported in the press that the European Commission is expected to demand disposals in patient monitoring, mobile x-ray machines and mammography equipment before approving the deal, but GE remains comfortable with the prospects for the deal closing in Q3. The E.U. Commission expects to complete its investigation of the deal by September 11 (which represents a delay compared to the original August 13 deadline set by the commission). Some Thoughts on Valuation -------------------------------------------------------------------------------- Modest (and better quality) earnings growth at GE in the face of a more challenging economic environment where other companies are struggling to post growth we believe makes GE shares attractive particularly in light of a dividend yield of 2.5%. We do believe that investors will again gravitate toward the higher quality names in the space (GE, DHR) as managements come clean on Q2 conference calls. If we are honest, we'd argue that business trends at companies that we've seen so far in May are probably a bit worse on the margin. Clearly the market is looking ahead to 2004 but we stand firm that 2H03 estimates are too high for many of the names who have rallied sharply since March. This means 2004 estimates are driven off the wrong base, in our view, (and in many cases still don't fully reflect pension headwind or options expensing). GE shares have outperformed the S&P 500 by 1.4% vs. group average outperformance of 5.8% over the past month. Relative to several of the big 20%+ movers in our space, we'd argue GE's numbers probably have less room to come down (we'd argue there could now be upside to our $1.58). We believe chairman and CEO Jeff Immelt has a clear vision for the company. He has articulated his plan to divest some of the more volatile, slower growing businesses and to expand the company's healthcare IT, water technology and services, oil and gas, security and sensors, Hispanic broadcasting and U.S. consumer finance businesses. We are comfortable with our 2003 estimate of $1.58, which we believe is predicated on very realistic (and rather conservative) assumptions. Divestitures are quite likely and would be viewed positively. The formal agreement on June 18 between GE and IUE-CWA union leadership concerning a new contract, while expected, is a net positive for GE shares. Union members are expected to ratify the new agreement by June 24. Nicole M. Parent (212) 583-8047 General Electric Co. 5 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- General Electric Quarterly Earnings Model ($mm)
Q1A Q2A Q3A Q4A 2002A Q1A Q2E REVENUES MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03 Aircraft Engines 2,577 2,764 2,721 3,079 11,141 2,383 2,626 Consumer Products 1,968 2,152 2,116 2,220 8,456 1,838 2,109 Industrial Products and Systems 1,629 1,899 1,880 2,033 7,441 1,887 2,026 Medical Systems 1,863 2,212 2,130 2,750 8,955 2,140 2,367 NBC 1,998 1,987 1,370 1,794 7,149 1,471 1,888 Plastics 1,179 1,420 1,329 1,317 5,245 1,262 1,278 Power Systems 5,271 6,526 5,123 6,006 22,926 4,234 4,242 Specialty Materials 401 608 689 708 2,406 677 778 Transportation Systems 482 594 521 717 2,314 520 576 GE Manufacturing Subtotal 17,368 20,162 17,879 20,624 76,033 16,412 17,890 Global eXchange Services 105 104 102 0 311 0 0 Eliminations (725) (807) (595) (900) (3,027) (654) (537) ------ ------ ------ ------ ------ ------ ------ GE MFG TOTAL REVENUES 16,748 19,459 17,386 19,724 73,317 15,758 17,353 GECS Revenues 13,899 13,852 14,981 15,455 58,187 14,730 14,706 Total GE Revenues 30,647 33,311 32,367 35,179 131,504 30,488 32,059 Eliminations (126) (97) 218 199 194 (22) (160) ------ ------ ------ ------ ------ ------ ------ TOTAL GE REPORTED REVENUES 30,521 33,214 32,585 35,378 131,698 30,466 31,898 YR/YR REVENUE CHANGE Aircraft Engines -5.9% -9.5% -4.6% 12.2% -2.2% -7.5% -5.0% Consumer Products 1.1% 6.3% -1.7% -3.9% 0.2% -6.6% -2.0% Industrial Products and Systems -3.6% 5.1% 18.8% 22.2% 10.4% 15.8% 6.7% Medical Systems 1.9% 12.9% 6.9% 4.6% 6.5% 14.9% 7.0% NBC 47.9% 8.5% 30.5% 16.7% 23.9% -26.4% -5.0% Plastics -18.6% 4.2% 5.9% 11.0% -0.1% 7.0% -10.0% Power Systems 23.7% 26.9% 1.7% 4.1% 13.4% -19.7% -35.0% Specialty Materials -17.5% 23.3% 61.7% 71.8% 32.4% 68.8% 13.0% Transportation Systems -12.0% 3.8% -12.4% 12.0% -1.7% 7.9% -3.0% GE Manufacturing Subtotal 6.6% 10.5% 5.5% 9.2% 8.0% -5.5% -11.3% GE Mfg Total Revenues 5.7% 10.6% 6.3% 8.2% 7.8% -5.9% -10.8% GECS Revenues -5.6% -3.8% 12.7% -3.0% -0.3% 6.0% 6.0% Total GE Revenues 0.2% 4.1% 9.1% 3.0% 4.1% -0.5% 6.2% Eliminations -9.4% -41.6% -207.4% -208.2% -128.0% -82.5% -0.5% Total GE Reported 0.3% 4.4% 10.6% 4.1% 4.8% -0.2% -3.8% Eliminations as % of sales 4.2% 4.0% 3.3% 4.4% 4.0% 4.0% 3.0% Eliminations as % of op 1.5% 2.4% -4.2% 3.8% 1.2% 2.7% 3.0% Q1A Q2A Q3A Q4A 2002A Q1A Q2E OPERATING PROFIT MAR-02 JUN-02 SEP-02 DEC-02 ANNUAL MAR-03 JUN-03 Aircraft Engines 421 566 512 561 2,060 474 551 Consumer Products 1ll 148 97 139 495 113 155 Industrial Products and Systems 123 157 153 164 597 139 174 Medical Systems 266 401 347 532 1,546 306 438 NBC 313 545 330 470 1,658 343 594 Plastics 207 275 224 137 843 91 132 Power Systems 1,552 1,910 1,418 1,375 6,255 896 891 Specially Materials 47 94 56 8.5 282 59 132 ------ ------ ------ ------ ------ ------ ------ Transportation Systems 53 124 91 134 402 69 114 Total GE Manufacturing 3,093 4,220 3,228 3,597 4,138 2,490 3,182 Global eXchange Services 5 10 1 0 16 0 0 ------ ------ ------ ------ ------ ------ ------ Eliminations & other (45) (102) 134 (135) (164) (67) (95) ------ ------ ------ ------ ------ ------ ------ GE MFG TOTAL OPERATING PROFIT 3,048 4,118 3,362 3,462 13,990 2,423 3,086 GE Capital Net Income 1,657 1,327 1,551 91 4,626 1,670 1,605 ------ ------ ------ ------ ------ ------ ------ GE Total Segment Profit (incl. Mfg eliminations) 4,705 5,445 4,913 3,553 18,616 4,093 4,691 Other Income (JVs, etc.) 86 103 486 431 1,106 76 100 Minority Interest (42) (50) (45) (46) (183) (32) (50) GE Mfg OP Elimination (from above) (45) (102) 134 (135) (148) (67) (95) ------ ------ ------ ------ ------ ------ ------ Corporate Items & Eliminations (Sep '02) (1) (49) 575 250 775 (23) (45) GE MFG OP Elimination (from above) 45 102 (134) 135 148 67 95 GECS Goodwill Amortization (Sep '02) 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ Interest and Other (157) (75) (212) (125) (569) (208) (300) Earnings, pre-tax 4,592 5,423 5,142 3,813 18,970 3,929 4,441 Taxes (1,074) (997) (1,055) (711) (3,837) (715) (766) ------ ------ ------ ------ ------ ------ ------ EARNINGS FROM CONTINUING OPERATIONS 3,518 4,426 4,087 3,102 15,133 3,214 3,675 Shares Outstanding 10,033 10,029 10,017 10,017 10,024 10,017 10,017 EPS FROM CONT. OPS ('02 & BEYOND ex. GW) $ 0.35 $ 0.44 $ 0.41 $ 0.31 $ 1.51 $ 0.32 $ 0.37 EPS-% CHANGE 17.0% 14.0% 24.9% -21.0% 7.4% -8.5% -16.9% Q3E Q4E 2003E 2004E REVENUES SEP-03 DEC-03 ANNUAL ANNUAL Aircraft Engines 2,721 3,064 10,794 10,414 Consumer Products 2,170 2,447 8,563 8,680 Industrial Products and Systems 2,005 2,536 8,333 8,867 Medical Systems 2,343 3,012 9,862 10,789 NBC 1,370 2,055 6,784 6,784 Plastics 1,329 1,340 5,209 5,711 Power Systems 4,611 5,952 19,038 18,357 Specialty Materials 758 598 2,812 2,980 Transportation Systems 531 756 2,384 2,503 GE Manufacturing Subtotal 17,838 21,761 73,779 75,086 Global eXchange Services 0 0 0 0 Eliminations (535) (488) (2,213) (2,253) ------ ------ ------ ------ GE MFG TOTAL REVENUES 17,303 21,274 71,566 72,833 GECS Revenues 16,148 18,370 63,873 70,100 Total GE Revenues 33,450 39,644 135,439 142,933 Eliminations (167) (57) (407) (368) ------ ------ ------ ------ TOTAL GE REPORTED REVENUES 33,283 39,586 135,032 142,565 YR/YR REVENUE CHANGE Aircraft Engines 0.0% -0.5% -3.1% -3.5% Consumer Products 2.5% 10.2% 1.3% 1.4% Industrial Products and Systems 6.6% 24.8% 12.0% 6.4% Medical Systems 10.0% 9.5% 10.1% 9.4% NBC 0.0% 14.5% -5.1% 0.0% Plastics 0.0% 1.8% -0.7% 9.6% Power Systems -10.0% -0.9% -17.0% -3.6% Specialty Materials 10.0% -15.5% 16.9% 6.0% Transportation Systems 2.0% 5.5% 3.0% 5.0% GE Manufacturing Subtotal -0.2% 5.5% -3.0% 1.8% GE Mfg Total Revenues -0.5% 7.9% -2.4% 1.8% GECS Revenues 21.7% 18.9% 9.8% 9.7% Total GE Revenues 7.8% 12.7% 3.0% 5.5% Eliminations -0.5% -128.7% -309.7% -9.5% Total GE Reported 3.3% 11.9% 2.5% 5.6% Eliminations as % of sales 3.0% 2.2% 3.0% 3.0% Eliminations as % of op 3.0% 1.5% 2.5% 1.2% Q3E Q4E 2003E 2004E OPERATING PROFIT SEP-03 DEC-03 ANNUAL ANNUAL Aircraft Engines 533 500 2,058 2,021 Consumer Products 153 185 606 663 Industrial Products and Systems 176 321 810 971 Medical Systems 391 612 1,747 1,941 NBC 382 606 1,926 2,108 Plastics 153 186 562 840 Power Systems 959 995 3,741 2,754 Specially Materials 129 96 416 498 ------ ------ ------ ------ Transportation Systems 101 162 446 476 Total GE Manufacturing 2,977 3,664 12,312 12,273 Global eXchange Services 0 0 0 0 ------ ------ ------ ------ Eliminations & other (89) (56) (308) (147) ------ ------ ------ ------ GE MFG TOTAL OPERATING PROFIT 2,888 3,608 12,004 12,125 GE CAPITAL NET INCOME 2,204 2,222 7,677 8,730 ------ ------ ------ ------ GE Total Segment Profit (incl. Mfg eliminations) 5,092 5,829 19,681 20,855 Other Income (JVs, etc.) 120 204 500 500 Minority Interest (45) (67) (194) (187) GE Mfg OP Elimination (from above) (89) (56) (308) (147) Corporate Items & Eliminations (Sep '02) (14) 81 (1) 166 GE MFG OP Elimination (from above) 89 56 308 (147) GECS Goodwill Amortization (Sep '02) 0 0 0 0 ------ ------ ------ ------ Interest and Other (300) (392) (1,200) (1,200) Earnings, pre-tax 4,867 5,575 18,811 19,968 Taxes (719) (800) (3,000) (2,978) ------ ------ ------ ------ EARNINGS FROM CONTINUING OPERATIONS 4,148 4,775 15,811 16,990 Shares Outstanding 10,017 10,017 10,017 10,017 EPS FROM CONT. OPS ('02 & BEYOND ex. GW) $ 0.41 $ 0.48 $ 1.58 $ 1.70 EPS-% CHANGE 1.5% 53.9% 4.6% 75%
Source: Banc of America Securities LLC estimates, company reports General Electric Co. Nicole M. Parent (212) 583-8047 6 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- REG AC - ANALYST CERTIFICATION The primary research analyst whose name appears in this research report certifies that: (1) all of the views expressed in this research report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. -------------------------------------------------------------------------------- IMPORTANT DISCLOSURES Banc of America Securities LLC Stock Rating System The rating system is based on a stock's forward-12-month expected total return (price appreciation plus dividend yield). The prospective rates of return that help define the Buy, Neutral and Sell ranges are subject to change from time to time, corresponding with changes in prospective rates of return on competing investments. The specific volatility levels that divide our stocks into low, medium, high and extreme ranges are subject to change from time to time, corresponding with changes in the volatility of benchmark indexes and the companies that comprise them. Volatility Ratings ---------- ------- Buy Neutral Sell --- ------- ---- Low 0-30% 10%+ 9%-(6)% (7)% or worse Medium 31-40% 15%+ 14%-(10)% (11)% or worse High 41-70% 25%+ 24%-(15)% (16)% or worse Extreme 71%+ 50%+ 49%-(25)% (26)% or worse Source on volatility: Bloomberg -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Rating Distribution US Coverage Coverage Universe Companies Percent Investment Banking Clients Companies Percent* ------------------------------ ------------------------------------------------ Buy 248 41 Buy 209 84 Hold 321 53 Hold 267 83 Sell 42 7 Sell 34 81 Diversified Industries Sector Coverage Universe Companies Percent Investment Banking Clients Companies Percent* ----------------------------- ------------------------------------------------- Buy 9 30 Buy 7 78 Hold 20 67 Hold 15 75 Sell 1 3 Sell 0 0 * Percentage of companies in each rating group that are investment banking clients. As of 06/01/2003. -------------------------------------------------------------------------------- The analysts and associates responsible for preparing this research report receive compensation that is based upon various factors, including Banc of America Securities' total revenues, a portion of which is generated by Banc of America Securities' investment banking business. They do not receive compensation based upon revenues from any specific investment banking transaction. Banc of America Securities prohibits analysts, their associates and members of their households from maintaining a financial interest in the securities or options of any company that the analyst covers or that fall within the analyst's coverage sector except in limited circumstances (for securities and options acquired prior to July 9, 2002) as permitted by the New York Stock Exchange and the National Association of Securities Dealers. Any such direct stock ownership by an analyst(s) preparing this report in his or her covered companies mentioned in this report is disclosed below. The absence of any such Nicole M. Parent (212) 583-8047 General Electric Co. 7 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- disclosure means the analyst(s) preparing this report does not have any such direct stock ownership in his or her covered companies mentioned in this report. Such persons may own diversified mutual funds. As of the date hereof, Banc of America Securities also permits analysts, their associates and members of their households to maintain financial interests in funds and other private investments that may include companies in a sector the analyst covers if the person acquired the financial interest prior to July 9, 2002. 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Banc of America Securities LLC and/or its affiliates has received compensation for investment banking services from this company, its subsidiaries or affiliates during the previous 12 months: DHR, GE. Banc of America Securities LLC and/or its affiliates expects to receive, or intends to seek, compensation during the next three months for investment banking services from this company, its subsidiaries or affiliates: DHR, GE. Banc of America Securities LLC and/or its affiliates was manager of a public offering of debt securities for this company in the previous 12 months: GE. Banc of America Securities LLC and/or its affiliates was comanager of a public offering of debt securities for this company in the previous 12 months: GE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- General Electric Co. (GE) -------------------------------------------------------------------------------- Target Price, Valuation Method, Risk Factors Target Price: $35.00 Valuation Method Used To Reach Applying ~15% premium to the S&P '04 forward-P/E of 18X Target Price: to our 2004 EPS est. of $1.70. Risk Factors: 1. Delayed macroeconomic recovery could mute short cycle recovery and therefore contribution to earnings in near term. 2. Further erosion at key Power and Aircraft Engine customers could also pressure earnings over and above what we ve modeled. 3. GE's earnings guidance is dependent upon acquisitions which may not necessarily materialize. 4. Impact of SARS could disrupt company cost initiatives in Asia and slow sales growth there. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Danaher Corp (DHR) -------------------------------------------------------------------------------- Target Price, Valuation Method, Risk Factors Target Price: $78.00 Valuation Method Used To Reach We assume stock trades at 30% premium to S&P 500 year TargetPrice: forward earnings. Risk Factors 1. Delayed macroeconomic recovery could mute short cycle revenue recovery. 2. Integration issues with recent acquisitions could negatively impact profitability. 3. Impact of SARS could disrupt company cost initiatives in Asia and slow sales growth there. -------------------------------------------------------------------------------- General Electric Co. Nicole M. Parent (212) 583-8047 8 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- GENERAL ELECTRIC CO. (GE) RATING SYSTEM AS OF JAN. 12, 2003 Stock Price Chart (rating and target New rating system: price changes indicated) Buy, Neutral and Sell U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system: Current Analyst: Parent N. SB, B, MP, U and S [Chart omitted reflecting stock price of General Electric from approximately June 1, 2000 through May 30, 2003 incorporating Bank of America analyst ratings.] SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell, CIT=Coverage in Transition (C)FactSet Research 2003 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- DANAHER CORP. (DHR) RATING SYSTEM AS OF JAN. 12, 2003 Stock Price Chart (rating and target New rating system: price changes indicated) Buy, Neutral and Sell U.S. Dollar (June 1, 2000 - May 30, 2003) Prior rating system: Current Analyst: Parent N. SB, B, MP, U and S [Chart omitted reflecting stock price of Danaher Corp. from approximately June 1, 2000 through May 30, 2003 incorporating Bank of America analyst ratings.] SB=Strong Buy, B=Buy, N=Neutral, MP=Market Performer, U=Underperform, S=Sell, CIT=Coverage in Transition (C)FactSet Research 2003 -------------------------------------------------------------------------------- 9 BANC OF AMERICA SECURITIES -------------------------------------------------------------------------------- This report is issued in the U.S. by Banc of America Securities LLC, member NYSE, NASD and SIPC; in Europe by Banc of America Securities Limited; and in Asia by BA Asia Limited (referred to herein, collectively as 'Banc of America Securities') as part of its research activity and not in connection with any proposed offering of securities or as agent of the issuer of any securities. This report has been prepared independently of any issuer of securities mentioned herein. 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