It was back on 11/23/2011 when I suggested buying 5 stocks that had dipped to very attractive levels. For all intents and purposes it marked the beginning of the "Team Alpha Retirement Portfolio." Today, each of the 5 stocks suggested has increased quite significantly. But one stock in particular was, and continues to be, disliked on many levels; General Electric (GE).
Whether it is the company management, the completely advantageous tax liability it has enjoyed, or the financial issues that rocked the company to its knees during the fiscal crisis 5 years ago, there have been so many ways to choose not to own shares of the stock when it was selling under $15.00/share.
- Jeff Immelt was too "chummy" with the current administration.
- The BOD and Immelt had to cut the dividends when Immelt promised it wouldn't.
- GE Capital was one of the financial businesses responsible for causing the financial meltdown.
- Jack Welch was no longer running the show, and he was "the man!"
I believe I read far too many comments on the issues noted above, and some were far more descriptive than my own bullet points. More than a few investors chose to never buy GE stock again! I suppose when a stock that has disappointed so many people begins to recover, it will continue to get knocked for old reasons, and even new ones, until lo and behold the share price has risen to a point where even the investors who "would never own GE stock again," begin jumping on the bandwagon.
That is one of the hazards of a "perfect" stock; when everyone finally agrees that the stock is wonderful and everyone has to buy shares, the perfect stock is the stock I want to dump, fast.
Fortunately, GE is still far from being wonderful in the eyes of enough investors, and I feel really good about buying more of GE shares. Today, after the 1st quarter earnings report, the shares are on sale.
GE "Beats" Estimates, But Perfection Is Elusive
This morning, GE reported 1st quarter results, and by just about every metric used in determining the value of a company, GE had a solid quarter.
Seeking Alpha "market currents" was right on the story, early this morning:
6:31 AM General Electric : Q1 EPS of $0.39 beats by $0.04. Revenue of $35.0B beats by $0.3B
Now let's get real, earnings beat estimates by $.04/share AND revenues beat estimates by $300 million. In my book that is a good quarter. Of course this is another hazard of a perfect stock. Every minute detail is parsed to turn an obvious positive into a complete negative!
Based on some comments that Jeff Immelt made, it appears that the bears and the shorts are jumping all over the stock right now.
"Our equipment orders were strong in the quarter, growing 10%, with Oil & Gas orders up 24%, and Aviation up 47%," said GE Chairman and CEO Jeff Immelt. In growth markets, equipment and service orders grew 17%. We ended the quarter with our biggest backlog in history...GE's markets were mixed. The U.S. and growth markets were in line with expectations. We planned for a continued challenging environment in Europe, but conditions weakened further with Industrial segment revenues in the region down 17%. Overall, Power & Water markets were worse than we expected. While we anticipated significantly fewer wind and gas turbine shipments, we saw additional pressure in European Power & Water services. This weakness also had a negative impact on margins. We always anticipated that the first half of 2013 would be our toughest comparison; we expect Power & Water to improve during the year and be positive in the second half."
So, after this commentary, it appears that Mr. Market has honed in on several sections of it that I highlighted myself in bold type. What has seemingly been ignored are some of the main issues:
- GE beat earnings and revenues for the quarter.
- $138 billion in cash and equivalents (seepage#6), is now in the company coffers.
- EPS increased by 15% or $.39/share (vs. $.35 estimated).
- Revenues were viewed as "flat' but actually beat estimates by $.03 billion as noted by Seeking Alpha "market currents."
- GE Capital earnings increased by 9% (this will go directly into GE as a portion of dividends paid by the way, to the tune of $447 million)
- 2013 outlook remains unchanged and the company is well positioned to advance all business segments.
- GE repurchased $1.9 billion in shares, and distributed a total of $3.9 billion including dividends.
- Finally, Immelt concluded initial comments with this:
"Despite the challenging macro environment, GE is well-positioned for stronger performance for the remainder of the year and we are executing on our strategic priorities. We are using our complete and early exit from media to increase investment in our core industrial businesses, through accelerated restructuring, investment in technology, and investment in our global capabilities. We expect our cost-out efforts will mitigate weakness in specific markets, and we have a very strong cash position. Our overall framework for the year remains unchanged."
Rather than focusing on the obvious positives, many shareholders have focused in on the headwinds that GE does face, and the stock is trading at roughly $21.81/share, down about 4% as of right now.
As far as I am concerned, being a "perfect stock" means disappointing investors even with more positives than negatives. Which if we think about it, happens to offer a buying opportunity for investors who are viewing this report as a rather positive one.
With This Report, As Well As Recent Events, GE Is Well Positioned
The dividends that GE pays have been rising. Back in December 2012, the company announced a 12% increase in its quarterly dividend. It also approved an additional $10 billion in share buybacks (an amount equal to Apple's buy backs, FYI) through 2015.
With the early completion of the NBC Universal sale, nearly $17 billion in "surprise" cash has been deposited, a full year sooner than expected, in the company coffers. A major question shareholders will have, is if the company will increase dividends on top of what it has already done. More clarity on this issue could come to light during the upcoming shareholders meeting, but as I noted in this article in February (when the NBC deal was completed), the company has a very clear idea of how it intends to give shareholder value:
Also noted in today's conference call, one analyst stated this:
The NBC sale helped GE's cash balance jump to $138.1 billion from $125.9 billion in the fourth quarter of 2012. The rise has led some investors to hope for yet another dividend hike. "I expect it (dividend increase) to go from 19 cents to 21 cents ... but I don't expect it this quarter. Maybe next quarter," *DeGan said. (*Jack DeGan, chief investment officer at Harbor Advisory Corp.)
Please note the focal points of how GE intends to utilize the cash it has. Shareholders could benefit directly in two key ways:
- A potentially large dividend increase this year (on top of the 12% already announced).
- Outstanding share buyback programs that could boost the stock price (perhaps even more than an already increased plan).
Is it unrealistic to think that the company will give shareholders more, on top of the December announcements and the analysts' opinions?
By enhancing its oil and gas business with the recent purchase of Lufkin Industries, GE is making more of a statement that it intends on growing the energy business segments, as well as relying on the aviation, transport, and healthcare divisions. As far as I am concerned, this will bode well for shareholders going forward, even at current levels.
Maybe GE will continue to be the "perfect" stock that many investors loath.
Disclaimer: The opinions of the author are not intended to be a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.