Despite CEO Confusion, General Electric Is a Good Buy

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Apr 27, 2015

General Electric (GE, Financial) posted strong results in the fourth quarter. These strong results were predominantly driven by healthy organic growth of 9% in its industrial segment with 50 basis point margin expansion. Industrial EPS rose 23%, coupled with 3% growth in its orders. Also, its backlog reached to a new level to $17 billion year-on-year basis, which is impressive enough.

Strong momentum across the board

Looking forward, the company is seeing good momentum at some of its businesses such as aviation, healthcare, power and water and GE capital. Also, its oil and gas segment is performing well against not so favorable market conditions. The company expect these positive markets to continue in 2015. It expects its diverse and integrated model to enhance its profitability this fiscal year.

General Electric continues to deliver against its priorities, which are driving growth for company but not at the level investors and shareholders had liked. These guys are looking for a change as the company’s share has been down approximately 35% under the current chairman and Chief Executive Officer, Jeffrey Immelt. Jeffrey Immelt has been in the driver’s seat for about 13 and half years.

A look at the performance of its CEOs

General Electric had been on a roller coaster mode during the long tenure of Jack Welch, who was CEO for GE before Jeffrey Immelt. The company had traded approximately 30 times earnings at the peak under Jack Welch. At present, the company is trading at earnings multiple of 15 times under Jeffrey Immelt.

GE’s revenue, under Jack Welch in the year 2000 was $129.8 billion and its earnings were $12.735 billion, or earnings of $1.27 per share. In fact, its revenue had grown $183 billion with earnings of $18.1 billion prior to recession. However, General Electric reported revenue of $148.6 billion and earnings from continued operation of $15.3 billion in 2014.

These are couple of critical fundamentals that are building pressure on Jeffrey Immelt and he is ironically feeling the heat of this mounting pressure. As per a report by Bloomberg , Jeffrey Immelt may resign from its current position in about dozen of months. The report expects the current Chief Financial Officer Jeff Bornstein to be the front runner to fill up the position.

Jeff Bornstein has been quite impressive with its approach to cut down costs and improve earnings quality. Jeff Bornstein has dramatically redesigned the 10-K of late that now simplifies its strategic direction, performance and focus.

The investors expect the new CEO to take the company back prior to recession and become a driving force at GE. These guys perhaps would like to see GE trading at or above 20 times earnings and to finally bridge that gap of Jack Welch. The investors expect the change to become growth catalyst for GE going forward.

Neveretheless, the recent moves taken by Jeffrey Immelt has been outstanding. Its decisions to invest in growth such as Alstom acquisition should deliver better returns for its shareholders and investors going forward. GE expects this acquisition to become extraordinary and compelling financial and strategic driver for GE in the future. Alstom has been identified as carrying one of the best turbine technologies in the world. This should uplift growth for its service business with relatively high margins.

Apart from this the company has taken another big step to spin off its operation. GE plans to spin off its Synchrony operation. This spin off should result in substantial reduction In GE shares. GE expects Synchrony at the current price to return approximately $18 billion to $20 billion to its investors in the share exchange.

Conclusion

General Electric is taking various strategic moves like investment in Alstom and spinning off its Synchrony operation. This should drive its growth in the future. Moreover, its industrial sector remains quite profitable in the future. The analysts expect its earnings to grow at CAGR of 7.41% for the next five years. This indicates slow but steady growth for its earnings in the future.

Moreover, the stock is really cheap with trailing P/E of 17.25 and forward P/E of 14.21. Also, it has PEG ratio of 2.02 that continuous to support its growth in the long-run. It has profit and operating profit margins of 10.25% and 12.33% respectively for trailing twelve months.