After making a strong rebound from the low $20s in early 2003, GE’s stock has been hovering in the mid-$30s for the past two years. It’s not that I think isn’t a solid, well-run company; GE is absolutely profitable and reliable. They spend a good portion of their capital on R&D, and their new environmental initiatives show they’re looking forward. But I don’t think there’s much room for growth here, and your money is better used on a stock that has some upside.
Everyone knows that GE makes things like light bulbs and refrigerators; fewer people know that it also makes medical imaging equipment, aircraft engines, and other industrial products. Even fewer may know that GE has a banking division, GE Capital Services [GECS], which delivers about one third of the company’s revenues, and has been the most profitable division of late. With its industrial businesses being mostly cyclical, GE is relying in large part on GECS for its future growth.
It is GECS’s importance that makes me doubtful about long term growth. With interest rates likely to keep rising, the profitability of this division is going to decrease. Moreover, the resulting slowing of the economy will mean less corporate borrowing and less consumer borrowing for things like houses and expensive cars. This isn’t going to bring GE down, but it I think it will really limit growth.
Meanwhile, its energy divisions have been hit hard of late, and hurricanes and other natural disasters have revealed the risk in many of GE’s insurance divisions. These are areas that are unlikely to improve anytime soon.
There is some potential for growth abroad, especially as the company gets more than half its total sales in the U.S. Given how smart GE’s management is, I wouldn’t be surprised if they’re able to make some headway in foreign countries. But this is going to be a highly competitive field, especially if the US economy slows and everyone else looks across our borders for profits, and I wouldn’t expect GE’s foreign component to drive its stock price.
Personally, I think their best bet lies in the service sector; many companies are finding they can generate solid revenues by servicing the products they manufacture. Many of GE’s products tend to be capital investments that last awhile -- think turbines and engines -- and this new area might be a good way to increase revenues between sales.
Type of stock: A very well run company that is likely to keep generating profits for the foreseeable future. But there is no share price upside. It is too big and tapped out. And, they don't even have Katie Couric or Jack Welch anymore (just kidding)!
Price target: The only way I can see buying this one is if the stock drops below $30, I’d grab it and ride it back to the mid to high $30s. Otherwise I’d stay away unless you’re happy with a stock that will gain you a few dollars in share price and a decent dividend, in which case I’d grab it around $32 or $33.