General Electric (GE) has been a core part of my value and income portfolio for over a year. The company is in the middle of a transformation to become a more pure play industrial, medical technology and energy services firm. This should provide more consistent earnings streams and provide greater exposure to faster growing emerging/developing markets. The stock should be rewarded with a higher multiple and this should also help accelerate its dividend payouts and stock buybacks to reward investors. The company just announced a major milestone in this transformation. It will sell the remaining 49% of NBC Universal it owns to Comcast (CMCSA) for $16.7B.
Positive results from sale:
- This deal gets General Electric completely out of the media business which is a core part of its transformation strategy.
- It allows the company to accelerate its stock buyback program to $10B.
- The deal provides funds to build out the business lines it wants to grow market share in (Energy services, industrial manufacturing and medical technology).
- It will also allow the company to focus on one of its key remaining pieces of its transformation which is continuing to lower the percentage of revenues and earnings that come from its financing businesses.
4 reasons GE still has upside from $23 a share:
- The stock yields 3.4% and its payouts are up 90% since the end of the financial crisis.
- For a 3% plus yielder, GE is reasonably priced at just 12x forward earnings and a five year projected PEG of just over 1 (1.22).
- The stock buyback and reinvestment in more profitable lines of businesses should result in higher EPS over the medium and long term. I would look for some analysts' upgrades and/or raises of price targets on the stock in wake of this divestiture.
- S&P predicts cap-ex spending to accelerate to 10% growth in 2013 from 2012's 7% increase. Given the beleaguered consumer (Payroll tax holiday expiration, highest gas prices in January, refunds from IRS $35B behind where they were last year at this time, etc….), I think you will see a rotation out of consumer discretionary stocks to industrials in the coming months. This will benefit stocks like GE.
Disclosure: I am long GE.