Inside Wall Street: GE comes out of the cold
The leading global diversified industrial giant is on a comeback trail.
You could honestly say that General Electric (GE) is one of the originals in the vast world of business in America. Of the 12 original components of the Dow Jones Industrial Average ($INDU) in 1896 it's the only one still listed today in the now 30-stock market barometer.
Shares of the multinational conglomerate were vibrant market leaders in the 1990s, regarded as one of the leading so-called "glamour" stocks then.Unfortunately, various global challenges, including a steep recession in the U.S. have hammered the stock, which is now some 40% below its 2007 high and about 60% under its all-time peak of $60 a share. It's been a long while since GE managed to outperform the market.
Nonetheless, it would be a huge mistake to count out GE. The company's most recent quarterly results surprised even the bulls on the upside.
Now trading at $24 a share, the pickup in profit margins from its industrial operations during the second quarter buoyed the stock hitherto, boosting investor sentiment towards GE, prompting some of the Street's analysts to up their earnings forecasts and raise their price targets.
"Just when most of us were about to 'give up' on GE, it put together a surprisingly recent quarter," said Scott R. Davis, analyst at Barclays Capital.
GE beat the Street's expectations on margins in a clean way, he noted, showing better orders than expected and executing on most initiatives "in a far better way than the recent past."
The analyst pointed out that continued performance like this should attract a lot of investor attention through the rest of 2013, and this "buys GE the time until it can execute on the two most important remaining catalysts: achieve margin targets on the second half of 2013, and asset sales within GE Capital."
GE Capital is the unit that focuses on financial services, with major interests in real estate lending, retailer financing, asset management and consumer lending. "If executed correctly, the asset sales and outsized share buybacks will set up GE to have earnings quality and risk reduction that likely will re-rate the stock upward. Even if earnings dilution occurs," said Davis. He rates the stock as "overweight."
The second-quarter results show GE "can manage its costs in weak environment, be accountable for price realization and earn the types of returns that investors expect out of a company like GE," said Davis. He expects GE will earn $1.65 a share in 2013, and $1.80 in 2014.
"A GE back to its core roots is a very compelling investment story," said Davis, as it focuses on businesses where it has core competitive advantages, as in infrastructure, and in being a "low-cost supplier with the best product, scale and marketing muscle in the industry."
Stephen Leeb, president of Leeb Asset Management, said GE in many ways remains the great industrial and consumer company it always has been, and is "still a leader in a huge variety of critical fields, ranging from power generation, energy conservation and alternative energies to aviation."
"What has put GE in a long-standing doghouse is its massive stake in financial services," said Leeb, which at one time was considered a major plus. At its peak, GE Capital accounted for more than 50% of GE's total profits and for many years the division was regarded as a sure-fire money-in-the-bank generator of rapid growth. But GE Capital got burdened with overwhelming debt, exposing its far riskier leverage.
In recent years, GE has started downsizing GE Capital's operations and has been considering the possibility of spinning off parts of its financial segments. That would give GE a major lift, said Leeb. "A GE less dependent on GE Capital would warrant a considerably higher price-to-earnings ratio, which would make the company a lot more attractive growth investment," said Leeb.
Also a bull is Stephen A. O'Neill, analyst at investment firm Hilliard Lyons, who rates GE as a "long-term buy," based on its "strong upward earnings leverage in its industrial businesses."
He looks for progress in revenue and margins in the second half even in an uneven global environment. He noted that GE Capital is performing better as financial stresses have eased.
Among analysts who have raised their earnings forecasts is Christopher Glynn of Oppenheimer. He boosted his 2013 earnings estimate to $1.66 a share from $1.65, and to $1.80 in 2014.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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Despite its size, the IPO will create just two new members of the 10-figure club from its executive ranks. A few others could net hundreds of millions.
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