Typically, a diversified conglomerate with a market capitalization of over $240 billion wouldn't make investors all that excited. They would probably assume that the stock is past its glory days with limited room for growth. But I believe that General Electric (GE) does offer that growth opportunity. Most people just think about light bulbs and refrigerators when discussing General Electric, but the fact is that the company is able to generate revenue from a variety of business lines, in addition to some of its more common products. Below are 4 reasons why investors should consider investing in General Electric now.
Reason #1 - Fundamental
General Electric released its latest fourth quarter earnings report on January 18 of this year. It was a great report, and the stock saw significant appreciation, by roughly 3.4% after the report.
Overall, the company experienced tremendous growth. Total revenue increased by 4% from the same period in 2011. Infrastructure orders were up 2% and excluding wind and fx, orders were up 7%.
GE also experienced strong earnings growth. Operating EPS increased by 13% from the same period a year ago. Earnings from industrial segments increased by 12%. All 7 segments showed growth, and 5 of the 7 grew by double digits.
There were 4 key takeaways from GE's earnings report:
- There was strong industrial segment growth with operating profit increasing by 10% and organic revenue increasing by 8%.
- The company was able to improve its margins. There was a 120 bps improvement in 4th quarter margins, a 30 bps improvement in margins during 2012. The expectation is for a 100 bps improvement in margins for 2013.
- GE Capital paid $6.4 billion in dividends to the parent company. For a division that was really struggling several years ago, this is very impressive.
- The company as a whole is also doing a stellar job with balancing its capital allocation. $7.2 billion was allocated to paying out dividends, $5.2 billion was allocated towards doing a share buyback, and $4.3 billion was used for the Avio acquisition.
Reason #2 - AVIO Acquisition
On December 20, 2012, General Electric announced that it would acquire the aviation business of Avio S.p.A for $4.3 billion. The acquisition of Avio's aviation business, which provides components for GE Aviation and other engine companies, would further GE's participation in jet propulsion, one of the most attractive sectors of the aviation industry.
Additionally, Avio should strengthen GE's global supply chain capabilities as its engine production rates continue to rise to meet growing customer demand. The acquisition should also help GE in terms of margin expansion.
The acquisition should also help GE to create additional opportunities to offer Avio's products and services beyond the aviation industry. These new opportunities may include ship propulsion, power-generation, oil, and marine products. An example includes Avio's capabilities in transmission systems. These capabilities provide new opportunities in several sectors.
There may also be growth opportunities in the oil and gas industry. Energy companies need durable pumping transmissions that help compress and run as much as four million gallons of water into deep shale gas wells. Avio can provide this.
In the transportation sector, there may be opportunities to build transmission system for the helicopter manufacturing and services market. This is a $50 billion market, which GE has not been able to participate in as yet.
Clearly, the transaction presents a multitude of opportunities for expansion into new areas. Whether it comes true is another question, but it certainly provides the opportunity.
Reason #3 - Cheap Valuation
Even with the stock trading within 2% of its 2 year high, GE still presents an extremely attractive valuation when compared to its peers. Let's compare GE to Citigroup (C) (a large financial competitor) and Siemens (SI) (a large electronics competitor).
General Electric's PE ratio is currently 18.18. Citigroup's is currently 19.24. On that metric alone, GE looks like the better target, but let's look at a few additional metrics. Return on equity for GE is 12%, while Citi's is only 4%. Also, GE pays a much higher dividend than Citi. While GE rewards investors with a 3.2% dividend yield, Citi currently only has a 0.10% dividend yield. One thing in Citi's favor is the tax deal that Congress signed to start 2013. The deal extends the "active financing exception." In a nutshell, this exception allows corporations to avoid paying taxes on money earned by foreign subsidiaries as long as those earnings are not repatriated to the U.S. This allowed Citi to keep roughly $2 billion. However, it actually allowed GE to keep roughly $3 billion.
Now, let's switch gears and compare General Electric to its electronic competitor, Siemens. Siemens does have a PE ratio of 17.05, so it is slightly better than GE in that regard, but its dividend yield is only 2.70%, which falls well short of General Electric. One huge problem for Siemens is that its expected EPS growth rate for 2013 is only 0.50%. This is well short of the industry average, which comes in at 7.50%. And it is also well short of GE's 2013 expected growth rate, which stands at 10.50%. The two companies seem to have established much different strategies for the future. Siemens appears to be focused on cost cutting, while GE has focused on growth. GE has invested roughly $1 billion into its digital division and $4.3 billion in the Avio acquisition. Both of these investments should add immense value in the future, and is likely one of the reasons why GE's expected growth rate is so much higher than Siemens'.
Reason #4 - Technical
General Electric's stock has been on an absolute tear over the past 2 years, as the chart below shows.
Currently, the stock sits within 2% of its 2 year high, which was made just recently. The 52 week low is $17.43, so just within the past year, the stock has returned a little under 35% for investors. As the chart also shows, the stock rallied significantly on the company's latest earnings report.
With a strong earnings report and technical momentum, it appears that GE may be headed for even higher ground.
As good as the past and future look for General Electric, there are still a few risks facing the company. One potential risk is its heavy involvement in the financial services sector. GE Capital was a severe burden during the U.S. financial collapse of 2008 and 2009. Should our economy see another episode of that, General Electric could be hit harder than most other companies.
A second potential risk has to do with the current gridlock in Congress. It appears that we are headed for major decisions every couple of months until Congress can finally strike a long-term budget deal. The financial industry tends to get hit hardest whenever there is uncertainty about the future, and this could trickle down to GE Capital and GE as a whole.
While the risks facing General Electric are very real, the financial performance, valuation, superiority to competitors, and technical momentum are too much to ignore. The stock has already returned 35% and on top of that, pays a 3.2% dividend yield. With its acquisition of Avio, it appears poised for growth that didn't appear possible before. While nothing is certain, General Electric looks like a strong winner for the future.