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Why Gurus Are Hot on This Energy Infrastructure Company
Posted by: Pato Kehoe (IP Logged)
Date: January 6, 2014 05:26PM
Investors tend to like firms that return large sums of capital to shareholders, especially when they are doing well. In the diversified industrials segment, General Electric Co (GE) is one such company. This major supplier of industrial goods for the energy management, power, oil and gas, aviation, transportation and health care sectors, has not only given shareholders back $18 million of their invested capital in 2013, but has raised the dividend by 16% for 2014. Hence, investors’ excitement regarding GE is quite understandable.
Guru Support and a Wide Economic Moat
With the backing of investment gurus such as Jim Simons, Steven Cohen, Ray Dalio and John Keeley, the premier infrastructure firm has been on my radar for some time. A wide economic moat, sustained mainly by its strong economies of scope, give GE the edge over rivals and have generated great long-term growth prospects. Service support is another aspect of the company’s economic moat, since the customer must follow the established service plan, or face the consequences of malfunction and possibly passing for repairs. Hence, GE has understood that it can keep clients' loyalty by offering solid service throughout the long duration of the contracts. Also, margins on the service end are much higher (around 25% versus 10% from equipment sales), leading to operating margins above the 20%.
According to CEO Jeff Immelt, GE’s projected organic revenue growth rate for 2014 is at 4% to 7%, which positions the firm as the strongest in the industry. It comes as little surprise that shareholders are excited, as huge opportunities are arising for the company continuously, and cash for investments is at hand. Through 2016, GE even anticipates it will generate around $90 billion in cash, mainly through large divestitures and increasing earnings. Shedding underperforming business sectors has been a core element over the past years, and is expected to continue, as GE intends on focusing on the energy infrastructure segment. In coming years, one could even picture GE as a leader in this growing industry, which is becoming the core factor in the company’s growth.
Towards Power Infrastructure and Improving Margins
Within the power infrastructure segment, GE is especially keen on advancing in clean-energy products, such as gas and wind turbines. Wind turbines have contributed significantly to generating a solid competitive advantage, even allowing the firm to surpass the Danish industry giant Vestas Wind Systems (VWS), thanks to superior customer care and manufacturing expertise. Hence, the road seems paved for continued success in this new industry sector, which is bound to continue growing as clean energy becomes more popular.
Overall, GE aims for margin expansion and organic sales growth in order to improve earnings, and the latest developments seem to suggest that the firm is on the right path. Leadership in infrastructure, global transportation and new clean energy segments, along with rising revenue from oil operations, and the aviation, health care and appliance business, are all important factors for the company’s success. And looking forward, none of this seems to be subject to negative change, so shareholders can rest assured, that GE will continue to grow.
A Solid Investment
In terms of its financial position, GE seems quite solid, with debt levels declining and lots of free cash. In addition, the recent sell-off of underperforming assets, along with reductions in administrative and general costs, have led to significant savings. With these new margins, and an increasingly industrial-based strategy – away from its financial sector GE Capital – should allow the firm to continue growing steadily. Thus, like the investment gurus mentioned at the beginning of the article, I too feel bullish regarding this stock.
Patricio Kehoe holds no position in any stocks mentioned.
Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
John Keeley: Current Portfolio, Stock Picks
Stocks Discussed: GE, VWS,