18 Billion Reasons to Buy this Stock
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In a few rare cases it actually matters less what the company does, and is more important to know how the company plans to spend their money. This is likely to be the storyline for General Electric (NYSE: GE) in 2013, as the company's sale of its ownership in NBCUniversal to Comcast may be the driving force behind its shares. I’m not suggesting that GE won’t do well this year on its own, but instead that the proceeds from this previously mentioned sale may play a very important role in the stock’s overall return.
Getting Back to Basics
One overarching theme at General Electric over the last several quarters has been downsizing their GE Capital division. It seems that GE management is uncomfortable with the size and importance of this one division. Depending on your investment thesis for GE, this could either be a very wise decision, or a very poorly timed choice.
As many people know, General Electric competes in many different industries, and names some of the most important companies in these industries as its competition. One industry that is expected to see terrific growth over the next several years is the airline and aerospace industry. Two of the larger players in this area besides GE are United Technologies (NYSE: UTX) and Boeing (NYSE: BA). With thousands of new airplanes being built, GE and United Technologies are racing to become important suppliers to Boeing.
It’s actually somewhat ironic that General Electric is expected to grow earnings at a slower rate than either United Technologies or Boeing. Both of GE’s peers are expected to see earnings growth of better than 13.5% over the next few years. General Electric, on the other hand, is expected to grow earnings by just under 11%. A big part of the difference is the fact that United Technologies made the strategic decision to acquire its way to more importance in the airline industry, while General Electric has been focusing more on the oil and gas boom.
Another company that General Electric faces in its climate control division is Johnson Controls (NYSE: JCI). As the economy improves, it’s expected that many companies would choose to upgrade their climate and control equipment to the benefit of both of these companies. However, as long as there is uncertainty, these companies may put off these expenditures until they are sure of their financial position. The good news for Johnson Controls' investors is that the company is a big player in batteries and auto systems. Even if the company doesn’t benefit from building upgrades, the increased business in the auto industry should carry Johnson Controls' business for the next several years.
If investors like the idea of buying a stock that is heavily tied to the industrial segment if GE has its way that is exactly what they’ll be getting. The company’s increasingly important divisions related to power and water, oil and gas, and aviation, should all benefit if the economy continues to improve. However, the other division that would benefit tremendously is actually GE Capital, which General Electric is looking to downsize.
Failing to Capitalize?
One of the greatest risks facing General Electric today might actually be the missed returns as it gets out of an industry just as it’s turning around. It’s understandable that management would be uncomfortable with the size of GE Capital given the fact that primarily due to this unit the company had to cut its dividend several years ago. That being said, the best way for this unit to improve is to make lending decisions in a better economy.
If General Electric continues to decrease the size of GE Capital, the company could find that it’s missing a great opportunity to add to earnings and value for shareholders. It’s one thing to bring this unit back in line with the company’s other divisions, it’s something else to run scared as the economy turns around when GE Capital could really benefit.
What’s Driving This Thing?
To figure out if GE is a good investment, you have to understand what is driving the company’s stock price. One positive from the company is their operating margin has stayed consistently higher than their peers. In the last three months, GE’s margin came in at 19.27%. By comparison, United Technologies reported the second best operating margin of the group at 13.93%, whereas Boeing's margin came in at just over 8%, and Johnson Controls reported a margin of just 3%.
An additional factor behind GE's popularity is that the company offers the highest yield of its peer group. At current prices investors are getting paid about 3.2%, compared to 2.25% at United Technologies and 2% or less at Johnson Controls and Boeing.
While a high-yield and a higher margin are positive factors for the stock, there might not be anything more important than the company’s plans for the $18 billion it received by selling NBCUniversal to Comcast. GE has essentially said that it plans to return almost 100% of the proceeds to shareholders through share repurchases. At current prices, this $18 billion would equate to retiring over 7% of the company’s diluted share count.
If you add together a 3.2% yield, an earnings growth rate of near 11%, and then boost that earnings growth from 7% less shares outstanding, you can understand why the stock should do well. If all goes according to plan, investors should be very pleased with the final result. If the economy continues to improve, General Electric’s industrial divisions should drive future growth.
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 Fool's offering comprehensive coverage for investors in a premium report on General Electric, in which The Fool's industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.
Chad Henage owns shares of General Electric Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!