A Bright Future for This Blue Chip Stock

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Energy, Oil & Gas, Aviation, Healthcare, Capital, Transportation, and Home & Business Solutions – General Electric (NYSE: GE) is leading its way to dominance everywhere. GE’s 3Q12 performance has been brighter than ever with this being one of its best quarters in many years. The overall profit for the company was up by ~8% to $3.49 billion and revenues increased by ~3% to 36.35 billion. This emerged as great news for investors. GE's stock has provided a return of ~38% to its shareholders in the last year that forces one to overlook its slightly dull performance in the last month. The long term prospects of the company are still good with expected growth for next five years at ~12%.

In the process of evaluating a company, it is very important to analyze its performance among its competitors. So let’s have a look at its peer set

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>6m Returns</strong></p> </td> <td> <p><strong>Forward Annual Dividend Yield</strong></p> </td> </tr> <tr> <td> <p><strong>General Electric </strong><span class="ticker" data-id="203664">(NYSE: <a href="http://caps.fool.com/Ticker/GE.aspx">GE</a>)</span></p> </td> <td> <p>7.85%</p> </td> <td> <p>3.40%</p> </td> </tr> <tr> <td> <p><strong>United Technologies </strong> <span class="ticker" data-id="205984">(NYSE: <a href="http://caps.fool.com/Ticker/UTX.aspx">UTX</a>)</span></p> </td> <td> <p>4.06%</p> </td> <td> <p>2.80%</p> </td> </tr> <tr> <td> <p><strong>Siemens </strong> <span class="ticker" data-id="205419">(NYSE: <a href="http://caps.fool.com/Ticker/SI.aspx">SI</a>)</span></p> </td> <td> <p>16.93%</p> </td> <td> <p>2.90%</p> </td> </tr> <tr> <td> <p><strong>3M </strong> <span class="ticker" data-id="204532">(NYSE: <a href="http://caps.fool.com/Ticker/MMM.aspx">MMM</a>)</span></p> </td> <td> <p>5.40%</p> </td> <td> <p>2.70%</p> </td> </tr> </tbody> </table>

Source: Yahoo Finance

United Technologies was recently in the news for acquiring Goodrich Corp for ~$18.5 billion, the largest ever Aerospace industry acquisition. After this deal, the company is planning to shift its focus on developing its Aerospace business and boost its market share in commercial aviation. The company generates ~20% of its revenue from growing economies, and in future it will benefit from increased profits from these emerging markets.

The German giant, Siemens, is also operating well in this industry. In order to remain competitive in the challenging environment, the company recently announced its “Siemens 2014”  program. This program includes a cost reduction plan that aims at saving ~$8 billion over the next two years for the company. Under this plan, the company aims to shore up its core activities in the future. Siemens had already announced its plans to sell off its 'Solar' business that incurred heavy losses of ~$300 million in its last quarter ended September. On the other hand, the company has also shown decent growth of ~17% in its stock price in the last six months as compared to its peers.

Another player in this industry is 3M, which is best known for its popular products like Scotch Tape and Post-It Notes. To expand its offerings, the company agreed to acquire 'Ceradyne', a ceramic maker for ~$850 million. This would help 3M to diversify its business into advanced ceramics technologies. The strong leadership position and a great reputation of Ceradyne would certainly help 3M to gain more market share.

What's attractive about GE among its peers is its forward dividend yield of 3.4% makes it an investor friendly stock. Its well diversified segments provide it with the competitive advantage. The company is looking for options to further diversify its operations through various investments. Let have a look at a few of them -

  • Its aviation arm, 'GE Aviation' has acquired assets of 'Morris Technologies' and 'Rapid Quality Manufacturing' to enhance its manufacturing competencies. The main aim behind this deal is to meet the growing demand of Jet Engine production rates over the next five years.
  • The company is also taking keen interest in pharmaceuticals. The investment arm of General Electric 'GE Capital' has acquired ~8% stake in Biocon subsidiary Syngene for ~$23 million. Biocon is also planning for an IPO for Syngene to raise funds for its capital expenditure. Looking at the GE’s track record of investments and successful partnerships in Asia I see this investment as a profitable one for the company.
  • GE is operating into 'Wind' business for ~10 years and it has recently achieved a landmark of installing 20,000 wind turbines. Looking at the shift in the nature of World markets, GE’s emphasis on the Wind sector is seen as an important move for the company. The company has gained its market share in India which is the third largest wind market growing at 30% a year after China and the US. Suzlon, one of the major Windmill developers in India has lost its market share to 35% from 50% in the last financial year and in the same time GE has given stable returns. With a change in the tax policy in India favoring large projects with better energy output, GE has a huge opportunity in this market.

Along with these investments, to further boost the cost‐efficient growth, GE is planning to save ~1 billion in 2013 and ~1.2 billion in 2014 via cost reduction programs. This would be an addition to its strong cash position, which is expected to be ~$100 billion from operations from 2012 to 2016. Looking at the various lucrative options of the company at this time, I see it heading into the right direction. In my opinion, GE is a favorable investment for the future. 

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!

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