I took the usual amount of flack when I wrote this article, proclaiming my opinion that General Electric (GE) is the perfect stock. Not just for our Team Alpha Retirement Portfolio, but for just about any investor's portfolio. A powerful combination of a new era of consistent dividend growth and capital appreciation upside potential that could double the share price over the course of 2-3 years from now. (Yes, my first guesstimate was 12-18 months, which I admit was overly optimistic)
Even if you are late coming to the party from when I first suggested buying the stock (click here), I believe the company and the stock is just getting started.
The Stock Is Still Cheap No Matter What The Naysayer's Claim
If we simply look at some basic fundamentals, we can see that relative to the S&P 500, as well as the company book value and cash from operations, the facts are that the stock might be able to re-visit not only the highs from before the recession, but also the all time highs of nearly $60.00/share.
- The forward P/E ratio stands at 13.59, which is well below the trailing P/E as you can see in the chart, of 18.34.
- The current book value to price ratio is a very low 2.07 for a company that is beginning to show a growth path.
- Cash from operations might now stand at $29 billion but total cash available has sky rocketed to more than $130 billion.
The latest earnings report highlighted the following key metrics:
- Operating EPS of $0.36, includes positive items of $0.02 offset by $0.04 of restructuring and other items.
- 2Q orders +4%; U.S. orders +20%.
- Profit growth in six of seven Industrial businesses.
- Industrial segment growth market revenues +5%.
- Industrial segment margins +50 bps. with strong performance in six of seven segments .
- $9.9 billion returned to shareholders year-to-date.
- Overall framework for 2013 remains unchanged.
Perhaps the most compelling aspect of the entire report was the announcement of an enormous backlog of orders waiting to be filled, shipped and billed. A staggering $223 billion to be precise.
$223 billion in orders yet to be filled translates into roughly $27 billion in profit, based on the most recent operating margins of 12.11%, and this is obviously in addition to revenues and profits that are coming in on a regular basis already, to the tune of $145 billion in revenues, and gross profits of $70 billion.
Just by these numbers alone, the share price could significantly increase in the neighborhood of 40%, just by placing last year's P/E ratio on the stock, and the overall growth from the yet to be completed backlog of orders in the house!
Obviously, Wall Street embraced these revelations as the stock has moved quite sharply since the report came out.
5% moves in huge mega cap stocks is not an everyday occurrence. That being said, the stock also has the obvious catalysts to continue on an upward trajectory.
Some Very Basic Catalysts To Move The Stock Even Higher
The company is sitting on an enormous amount of cash and it has publicly stated that returning shareholder value is a primary goal as it sticks to its overall business model.
Take a look at several charts:
This one is right from the company website.
This chart was displayed to analysts in a Florida analyst convention. I believe that this one chart should tell it all to investors who seek significant returns on their investments.
- The dividend yield is at 3.2% right now, and dividend increases are imminent. Last December the company boosted dividends by about 12%, and based on the recent announcements, I look for another significant increase in the 4th quarter of this year.
- $223 billion in order backlogs spell future growth and capital appreciation, as well as even more revenues and profits going forward.
- The recent acquisition of Lufkin Industries will be accretive to revenues and earnings as of now.
- That acquisition was on top of the acquisition of Avio S.p.A, which is already a productive part of the GE aviation business.
- A current payout ratio of just 50%, gives an indication that dividends are easily sustainable, and with that backlog and ongoing business, seems like a dividend increase slam dunk to me.
- A forward P/E ratio of just 13.59 is well below the overall major market indices; Dow Industrials-16.60, S&P 500-18.43, and Nasdaq 100-18.52.
The Bottom Line
As far as I am concerned, GE shares are cheap, and I believe could reach new all time highs, given the growth trajectory the company appears to be on.
Given the fact that the stock is now in a new era of dividend growth, I reiterate my opinion that General Electric is the "perfect stock" for BOTH dividend seeking investors and growth stock investors.
It is not too late to get in early!
Disclaimer: The opinions of the author is not a recommendation to either buy or sell any security. Please do your own research prior to making any investment decisions.