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Some Thoughts on the Growth Potential of General Electric
Posted by: Muhammad Bazil (IP Logged)
Date: October 18, 2013 05:26PM
General Electric (GE) is a multinational conglomerate with well-diversified chains of businesses, but nowadays it has become more of a controversial company with many investors questioning the strategies being adopted by its CEO, Jeffrey Immelt. There are many people including renowned analysts that now hold divergent views about the potential of the company for upside growth. Really, the unit prices of GE stock have consistently lagged behind their peers in the industrial sector in the last one decade. That alone is enough for the investing public to deride the current business strategies of the company. GE’s dividend policy under Immelt is another source of concern for many investors.
Indeed, the majority of shareholders who bought the shares of General Electric a short while ago may not be comfortable with the inability of the stock to break above the $25 price level except those who bought into the company at $6 a share some years ago. However, I supposed that those who are net buyers of GE stocks should wish for low prices for an extended period so that they could accumulate more shares of the company.
Those who are in doubt about GE’s hidden source of value surely have more information than what we all know in the public space. Some even feel the problem of GE is Immelt and the board of directors. But is GE’s current business model not sustainable? Is the strategy of shrinking GE Capital and streamlining its business segments not in the right direction?
Analysts’ Divided Views Regarding GE
Barron's and Goldman Sachs have released divided analysis about GE’s current business model and prospects for future growth. Barron’s opinion as expressed in a recent article is that GE has great prospects for upside growth taking into consideration the improvement in GE’s second quarter results compared to the same period of last year. GE’s $223 billion order backlog was also cited as evidence the company is on the path of growth.
On the other hand, Goldman Sachs’ analysis runs contrary to Barron’s growth prospect for GE. On its resumption of its coverage of GE, Goldman Sachs ascribed it a neutral rating with a price target of $26 citing limited earnings upside. Specifically, analysts at Goldman Sachs have this to say about GE:
"Our view is based on limited upside to 2013/2014 EPS coupled with a balanced risk/reward at this time. Specifically, we believe the 2013 margin targets are aggressive and a lower asset base at Capital will weigh on 2014 growth. Over the long term, we like GE's position in attractive markets, simplification efforts and actions since the global financial crisis to make Capital stronger/safer. However, while GE appears well on its way to achieving its ENI reduction targets, we believe more can be done to improve its returns/ growth profile, making it a more attractive investment longer-term."
The True Picture About GE: Who Is Wrong and Who Is Right?
It is reasonable to think that the two views couldn’t be right or wrong at the same time. While Goldman Sachs recognized that streamlining GE’s businesses by shrinking non-core assets like GE Capital to make the company look more of an industrial company is a positive step, arguing that such a positive move will reduce GE’s earnings for the 2014 fiscal year is rather contradictory. The board of directors of GE has a purpose in mind for attempting to shrink GE Capital from the parent company and that reason is to increase the valuation of the company among its peers in the industrial sector.
Though GE Capital has been a huge source of revenue for the parent company, its earnings aren’t always seen in the light of income from industrial activities leading to how it has been cheaply perceived among its peers. For example, among GE’s peers in the industrial sector like Honeywell International (HON), United Technologies (UTX), Illinois Tool Works (ITW) and Emerson Electric (EMR), only Illinois Tool Works is cheaper than GE, but it is miles apart in growth potential when compared with GE. So, GE stock trades at a huge discount relative to all of its industrial peers except ITW which is rather odd all because of GE Capital. Though GE Capital has been contributing about 30% of GE’s earnings and, hence, a good percentage of its earnings per share (EPS), shedding GE Capital is the only way to make the industrial segments of GE to strive for better growth in the near future to make up for the original earnings growth of GE facilitated by GE Capital.
In conclusion, General Electric is a growth stock that is worth considering by investors who are focused on the long-term prospects of the company. GE is surely an interesting stock value investors should own. There is every assurance that the company will offer above-average dividends in its next quarterly release and in the light of the share buybacks scheme the company has been pursuing lately, capital appreciation to investors is at the corner. GE is a BUY!
Stocks Discussed: GE, UTX, HON, ITW, EMR,
Re Some Thoughts on the Growth Potential of General Electric
Posted by: Enjoylife (IP Logged)
Date: October 19, 2013 11:13AM
Massive debt. Stagnant top line revs and bottom line net income for the last 10 years. Higher interest rates on debt (which are at historic lows) could easily crush them. Current interest expense just to service debt is equal to net income.
They are a no growth company with no clear plan to grow. And major issues. Graham said a clean no growth is worth 8.5x earnings. GE trades at 18.8x earnings (ttm) and no better normalized over 3 years. If you are a value investor, you would not touch this company at half the price.
Making a bet that it survives with 10% dividends in a time of no yield is one thing. Betting on it's common to outperform the market for the next 5-10 years is silly and dangerous.
Stocks Discussed: GE, UTX, HON, ITW, EMR,