General Electric: Buy This Transformed Industrial Giant

 

GEIn a nutshell, from an investor’s perspective this is the story about General Electric (NYSE: GE):

The company founded by Thomas Edison in 1890 saw its stock split nine times and climb to an adjusted all-time high of $42.16 by 2000, making it the world’s largest company by market capitalization. Then, over the following nine years, the stock gave up 87 percent of its value, plunging to a low of $5.64 in March 2009.  But driven by a changing business strategy, the stock rebounded to  $27.22, before closing on July 11, 2014 at $26.55.  Over that nearly five-year renaissance, the stock threw off a total return of 372%, for an annualized gain of 33.6% with dividends reinvested.

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Are GE’s glory days back? Well, maybe not, but under the 13-year leadership of CEO Jeff Immelt – who succeeded the legendary Jack Welch – the company’s business portfolio has been reshaped, guided by a philosophy that stresses innovation, globalization and growth over broad diversification and process orthodoxy.  He’s unloaded or is in the processing of trimming businesses that don’t meet his 10 percent annual earnings growth targets, like NBC-Universal and the consumer parts of its GE Capital finance business.

In their places, he’s acquired higher-margin companies with more growth potential, like Betz Laboratories, a specialty chemical company focused on water treatment, which GE bought in  2003; Amersham, PLC, a U.K. medical diagnostics company, which GE took on in 2004 to become a core piece of the GE Healthcare division; and Alstom S.A., the French engineering company GE has been cleared to buy next year. Alstom makes gas and steam turbines for electricity generation, equipment for the electrical utility grid,  and wind- and hydropower generators.

Under Immelt, R&D spending is also up, to 5-6 percent of revenues, with a good part of it devoted to creating software that optimizes machine performance (like making jet engines more fuel efficient), predicts when machines need repairs, and optimizing the performance of the systems in which machines are a part (like a railway or wind farm). It involves creating the “Internet of things,” an emerging high-tech market.  In the process, Immelt says he wants GE to become one of the 10 biggest software companies sin the world.

While not every move Immelt made paid off right away, he’s steered GE to a higher growth rate than it showed in the ten years before he took over.  Over the 10 years before Immelt took the helm, the company’s annual earnings growth rate was languishing at around 5 percent. The consensus on Wall Street is that GE’s earnings will grow at a rate of 8.93 percent a year. At the same time, GE’s sales have become less focused on the U.S. Foreign markets now account for 55 percent of GE’s sales, compared to 30 percent when he became CEO.

Today, GE is the sixth-largest company in the world by market capitalization and operates eight lines of business:  Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting, and GE Capital.  The company produces — take a deep breath — aircraft engines, locomotives and other transportation equipment, kitchen and laundry appliances, lighting, electric distribution and control equipment, generators and turbines, and medical imaging equipment. In 2013, GE generated 70 percent of its revenues from these seven industrial segments, and 30 percent from GE Capital,  a business-to-business financial service provider offering commercial finance, commercial aircraft leasing, real estate, and energy financial services.

After the stock market’s remarkable bull run of the last few years, very few Dow stocks are undervalued.  GE, with a dividend-adjusted PEG ratio of 1.18, is one of them, and why I rate the stock a buy. Other things going for it include a dividend of 88 cents, for a current yield of 3.31 percent;  increasing free cash flow that topped out at over $7 billion in March, and cash holdings of $11.7 billion.

Given GE’s current estimated earnings growth rate, by year-end 2019 he stock price could rise to between $43 at a trailing PE 18.0 and  and $52 at the current PE of 21.7.  That’s translates into a potential total return, without an increase in dividends, of 12 to 16 percent, respectively.  That’s a more modest return than the stock has thrown off over the last give years, but it’s worth my money.


About Lawrence Meyers
 lawrence meyersLarry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at pdlcapital66@gmail.com.

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