Is GE Still a Buy?
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even though General Electric (NYSE: GE) has reached a new 12 month high ($22.05) and the first time the stock has been in this neighborhood since 2008, I believe the key businesses of GE still has the right momentum which provides good opportunity to own GE shares. In my view, GE Capital worries have been largely depleted and industrial outgrowth continues to be the key with core revenue outperforming the group for the first time in a decade. I believe a key part of this remains the newly constructed Oil & Gas business, where gas compression and offshore demand are potential catalysts. Going forward, I expect following three segment of GE’s overall business to provide huge upside in topline and bottomline.
GE Capital- Portfolio Restructuring
GE’s largest segment is GE capital accounting for about a 1/3rd of the company’s earning with projected ~$45 billion in 2012 revenue and ~$8 billion in profit. The company has been continuously altering this segment of business since 2004. I believe the portfolio will continue to be reshaped in the next several years as the company shrinks its non-core consumer exposure and focuses on core end markets where it has expertise through its industrial franchise. I expect the portfolio to closely resemble its composition a decade ago, which I believe will enhance the company’s risk and return profile.
GE Aviation- Strong Demand of Commercial Aerospace
GE Aviation is the company’s second largest industrial business. This segment of business is expected to profit ~$4 billion in 2012. The segment has grown 7% in the last decade from $10.0bn to $18.9bn in 2011. Going forward, I anticipate the segment to grow at an average rate of mid-single digit in the next three years, driven by the strength of the commercial aerospace cycle offsetting weaker defense business. I believe GE Aviation’s margin will return to its historical average of 20% by 2013 given the company leverages peak R&D spending and higher production volumes. I also anticipate attractive longer-term growth trends in air travel, driven primarily by Asia Pac and China.
GE Energy- Several Potential Catalysts
GE Energy is the company’s largest industrial business, projected to generate close to $36bn in revenue and $5.7bn in profit in 2012. GE is the world’s leading manufacturer of gas turbines and steam turbines with an estimated global market share of 40%. GE’s industrial portfolio is skewed toward later cycle businesses, and pricing inflected in late ’11. In particular, I anticipate Power and Oil & Gas significant leverage to natural gas theme, and services at GE Aviation which I expect to drive an above-average EPS growth for GE in the coming years.
Valuation and Competition
GE competes against a number of other companies, but most of them are more specialized, focusing in one industry. For example, United Technologies’ (NYSE: UTX) Pratt & Whitney which compete with GE Aviation in producing airplane engines; Emerson Electric (NYSE: EMR) competes with General Electric Company in industrial equipment and healthcare supplies. The following table summarizes the expected EPS growth, dividend yield and forward PE of GE, United Technologies, and Emerson:
|
Company |
Expected EPS Growth (next year) |
ROE |
Dividend Yield |
Forward P/E |
|
General Electric |
12.18% |
10.60% |
3.08% |
12.75 |
|
United Technologies |
11.18% |
23.40% |
2.6% |
12.96 |
|
Emerson |
10.57% |
22.67% |
3.18% |
13.43 |
The company’s expected EPS growth is highest among its peer like UTX and Emerson, still the company is trading at lower forward P/E. I believe the discounted valuation is justified as it attributes to the low ROE. On an absolute basis, the company offers impressive dividend yield and has attractive valuation. Going forward, I expect the company’s increased focus on portfolio rationalization to demand a re-evaluation of the discounted valuation in near term.
Over the last two decades GE’s stock performance has closely tracked the company’s ROE. Going forward, I believe improving ROE at GE Capital, greater contribution from high margin service businesses, and improved pricing in later-cycle industrial businesses levered to natural gas will drive huge upside in earnings. Also, more regulatory visibility at GE Capital means that GE will be able to comfortably grow its dividend in line with earnings and support M&A and share buybacks which are highly likely to gain traction. Thus, I recommend it a buy.
Dig Deeper
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's --infrastructure leader--. At the same time, you need to be aware of the threats to GE's portfolio. To help, The Motley Fool offers comprehensive coverage for investors in a premium report on General Electric, in which their Industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Emerson Electric Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
