General Electric (GE), the poster-child industrial stock for the August 1982 to March 2000 equity bull market, reports their 3rd quarter, 2013 financial results before the bell on Friday morning, October 18th, 2013.
Analyst consensus is looking for $0.35 in earnings per share (EPS) on $35.955 billion in revenue for expected year-over-year (y/y) declines of 3% and 1% respectively.
Since the July earnings report, the consensus EPS estimate has fallen from $0.38 originally to $0.35 today, while revenue consensus has fallen little, from $36.00 to $35.95 currently.
That tells me that margins could be an issue despite the fact that the July 13 earnings report showed significantly improved margins in some key sectors like Industrials and Power.
Last quarter, (2nd qtr, '13) GE reported a year-over-year (y/y) decline in revenues of 4%, a decline in pre-tax income of 11% and a decline in EPS of 5%.
GE hasn't reported a y/y growth in revenues since q4 '12.
From a macro perspective, GE is facing some longer-term issues which we detailed here in an early August 13 article, with little changing since that time.
GE is forced to de-emphasize a business - GE Capital - which is still a big part of their revenue and asset base, and despite the fact that Financials today are "cleaner" and safer from a credit and risk perspective, than at any time in the last 20 - 25 years.
The Lufkin acquisition is interesting: hopefully GE can create or add value to that acquisition, even as the world seems to be turning more to electric cars and non-traditional fossil fuels for transportation.
Is this another anti-Immelt screed? No, not at all, I just think Jeff is in a very tough position in terms of creating shareholder value, given the traditional GE business model (i.e. industrial businesses wrapped around a captive finance company), with below trend growth around the world, and in most of GE markets. You can't manage a $250 billion public company within several different sectors like a stock portfolio: it takes time to re-position the business. But that being said, it seems like very little has been done to drive or create shareholder value.
The recent moves to spin-off GE Consumer Credit are a plus, and another positive we've noted is that GE is reducing fully diluted shares outstanding which is accretive to EPS, and does help. (If management uses the GE Consumer proceeds to repurchase shares, all the better.)
Here is the trend in y/y growth of GE's "fully diluted shares outstanding" for the last 4 quarters:
q2 '13: -3%
q4 '12: -1%
q3 '12: 0%
In terms of valuation, current consensus is looking for $1.64 in 2013, and $1.80 in 2014 for expected year-over-year growth of 9% and 10% on expected revenue growth of -1% this year and 3% in 2014.
The 3.5% dividend yield is enticing for conservative investors.
On a cash-flow basis, GE is generating about $30 billion per year, which has remained stable and with no growth since 2010, of which about half is spent on capex, and the other half is going towards the dividend and share repurchase.
With roughly $14 - $15 billion being spent on capex annually in the last 3 years, then why hasn't GE been able to generate 1 positive year of revenue growth in that period ?
Here is GE's y/y revenue and EPS growth for the last 5 years:
GE's y/y Revenue and EPS growth
|2013 (est)||-1% (est)||9%|
Despite the above issues, our internal valuation model puts an intrinsic value on GE close to $30 per share, while Morningstar's conservative discounted-cash-flow model values GE at $27, so we think GE remains undervalued.
GE is up about 16% year-to-date, which doesn't include the dividend, so in terms of relative performance, it is doing what we want within client accounts, and staying close to the benchmark return, without a lot of volatility.
GE outperformed the S&P 500 in 2012, up over 17% (excluding the dividend), versus the S&P 500's 16% return.
Maybe it is just a matter of waiting for a "return to global growth" theme, which means Europe, Japan, China and the U.S. are all growing GDP at +3% - +5% annually. That would mean GE is a "late-cycle" stock, and its better days lay ahead from an operations perspective.
We have a 1.7% position in GE, spread amongst client accounts. It is requiring more patience than we thought.