Consider GE for its Immense Growth Potential
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After its suffering during the financial crisis in 2008, General Electric (NYSE: GE) has been changing its focus back to its core industrial business. The conglomerate has entered different emerging markets, with the Industrial arm driving growth and generating strong earnings in the past few years.
Indicative of this growth is GE's recent announcement that it was raising its 2012 Industrial revenue growth forecast to 10%, while the other giant in mining, Caterpillar (NYSE: CAT), slashed its EPS outlook for 2015. Unlike Caterpillar, GE is considering the current slowdown in mining to be temporary short term volatility. Let’s have a look at the factors that are driving the company’s growth and making this stock lucrative for its investors.
GE in Mining
GE has decided to enter the mining equipment industry and is considering purchasing mining equipment maker Joy Global (NYSE: JOY). GE Mining is currently a part of GE Transportation, and generated $2 billion in revenue last year. GE plans to make smaller acquisitions to meet its goal of more than doubling annual mining revenue to $5 billion within a few years. This follows GE's age-old strategy of expanding into the market via acquisitions.
In the past three years all of GE’s Industrial segment revenues have increased. However, total revenues for the firm have been falling due to a decrease in revenue from GE Capital, the company’s financial arm. Before the financial crisis, GE Capital brought in almost half of the total yearly revenue for the entire conglomerate. In the fiscal 2011, total Industrial revenue increased by 11.8%. As evident from the graph, Industrial segment profit has remained stable at around $14 billion in the previous three years. Total earnings at the end of 2011 represent an almost 28% increase from the previous year. The pie-chart shows the segmental break-down of revenue at the conglomerate as at Dec 31, 2011. The GE Capital and the Industrial segments accounts for 32.7% and 67.3% of the total revenue, respectively.
Second quarter result shows revenue totaled $36.5 billion, an increase of 2.5% year over year. Industrial sales totaled $25.1 billion, increasing 8.8%, while Industrial profits increased 6.8% compared to last quarter. GE Capital revenue decreased 7.8%; however net earnings increased 31.4% to $2.1 billion.
Out of the six segments, Energy Infrastructure and Transportation have performed well. GE's Energy Infrastructure revenue totaled $11.9 billion, increasing 14.4% year over year. Transportation revenues increased 27.1% year over year, and profits increased 58.4% in the same period. This was mainly due to increased volume, higher equipment sales, and growth in locomotive sales and the global mining business. Aviation revenue increased 3% while healthcare revenues were relatively flat at $4.5 billion. GE's Home & Business Solutions revenue increased 2% year over year.
General Electric has recently signed a $1 billion contract with Brazil’s Petrobras to provide offshore equipment. The contract includes delivery of about 380 sub-sea wellhead systems and installation tools needed in oil well exploration. In July, GE Oil and Gas signed a $600 million, 22-year service contract with Chevron’s massive $43 billion Gorgon project. In addition, GE recently announced $63 million in new orders from at least 10 telecoms for Durathon batteries since its launch in July 2012. GE is also working with NASA to bring air traffic management to centralized cloud infrastructures, and it has recently unveiled high performance IT platforms for deployment by the defense sector.
These recent deals will not only add to the company's revenue, but also build industry recognition for the growing segments of GE.
Balance Sheet Fundamentals
GE reported cash and equivalents of $74.3 billion as on June 31, 2012. The company is a cash generating machine, and its cash flows from operations stood at $14.2 billion at the end of second quarter. However, the firm has been spending massive amounts in capital expenditures.
GE’s debt is a concern, with its debt/equity ratio of 1.9 is far above the market average. As of June 31, 2012, the company's total debt stood at $386.6 billion.
Valuation and Peer Competition
Fortunately GE is cheap right now. The stock is trading at around $22, with a 52-week range of $14.02 to $22.96. The company has a P/E ratio of 19.7, compared to an industry P/E of 17.5. Competitors such as Siemens (NYSE: SI) and Koninklijke Philips Electronics (NYSE: PHG) are in the same category, but are too expensive at the moment. Caterpillar, which competes with GE in several markets, reports P/E ratio of 9.62 and EPS of 8.94 respectively. Siemens and Caterpillar both beat GE in P/E and EPS. Siemen’s P/E ratio is lower at 15.6, and its sales growth in the past quarter is 9.5%, compared to GE’s 2.5%.
Increased dividend and buyback of shares
GE currently pays a hefty dividend yield of 3.02%, a dividend rate of $0.68. Its earnings per share is $1.15, but the company aims to reduce its outstanding share count below 10 billion, or back to the level it was before GE sold new shares to raise cash during the 2008 financial crisis. GE currently has 10.56 billion shares outstanding.
GE is a massive, profitable company with strong fundamentals and stable outlook. After the 2008 financial crisis, the management focused on the industrial divisions, which have helped to bring the conglomerate back on track and generate healthy amounts of profits and cash flows. The expansion of GE Mining has definitely benefitted the stock. Also, with an improved financial arm, GE Capital, the company's capacity to make acquisitions has improved. Investors are showing confidence in the stock due to strong earnings, growth, and a decent dividend payout. Therefore, it makes sense to consider buying the stock.
Interested in Additional Analysis?
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jhumpasarkar has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. 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.