General Electric: Fair Short-Term Valuation, Long-Term Appeal

| About: General Electric (GE)

With the end of the year approaching rapidly, many companies are issuing their outlook for 2014. General Electric (NYSE:GE) is among those companies, issuing an upbeat outlook for 2014.

GE sees further organic growth and margin expansion in the coming years, which should be a driver for the shares going forward.

I continue to like GE in the long term, but wouldn't chase up shares for a quick gain as shares are becoming expensive based on the company's current performance.

General Electric's Outlook For 2014

On Wednesday, General Electric announced its outlook for 2014 and beyond. On the back of its strong competitive advantages, GE foresees 4-7% organic growth for next year for its industrial activities, offset by a flat to minus 5% revenue contribution from GE Capital.

This plan should eventually result in the fact that 70% of earnings will be derived from the industrial activities by 2015. This compares to a percentage of about 55% at the moment. In fact, GE is now even targeting segment margins of 17% by 2016, after margins rose by an expected 70 basis points this year to 15.8% of total sales.

After the company achieved $1.5 billion in structural selling, general and administrative cost cuts in 2013, another $1 billion is estimated to be achieved next year. This simplification is the major driver behind targeted margin expansion. In the long term, these expenses are forecasted to decline from 15.5-16.0% in 2013 to 12% of total sales.

Targeted margin expansion combined with organic sales growth should boost earnings. Big trends continue to be the leadership in infrastructure, energy efficiency, global transportation, just to name a few. Earnings growth is seen at the oil & gas activities, aviation, healthcare and appliance & lighting business. The transportation is the only business for which the company sees lower earnings next year, as well as its capital business.

Shareholders Benefit As Well

Investors in GE had a good year as the company returned $18 billion to its shareholders this year. 2014 looks to be a promising year as well after the dividend has been increased by 16%.

In fact, General Electric earmarked about $90 billion in capital spending and shareholder payouts for the period 2014-2016. While the majority will be spent on share buybacks and mergers and acquisition, shareholders can continue to look forward to a decent dividend check as well.

The company aims to reduce the outstanding share base 9.5 billion shares while targeted acquisitions are seen between $1 and $4 billion.


Halfway through October, GE released its third quarter results. The company ended the quarter with $130 billion in cash and marketable securities. Total borrowings at $388 billion are mainly tied to the financial GE Capital unit. The industrial activities hold $10.3 billion in cash and equivalents while debt stands at $12.6 billion, resulting in a modest net debt position.

Based on the performance so far this year, GE is on track to generate annual revenues of around $144 billion as earnings could come in around $14 billion.

Trading around $27 per share, the market values GE at $274 billion. This values equity in the business at 1.9 times annual revenues and 19-20 times annual earnings.

Following GE's recent dividend hike to $0.22 per share, the company now provides shareholders with a 3.2% annual yield.

Some Historical Perspective

While investors can applaud the progress which GE has made following the financial crisis, long-term investors have not forgotten about the Capital business debacle, which nearly bankrupted the company if it were not for Warren Buffett to step in.

Despite the strong returns in recent years, shares are still far removed from highs of around $40 in 2007 and highs of $60 around the turn of the century.

Portfolio Updates Continue

Back in November, GE announced its intentions to sell its consumer lending business in North America. The business provides credit cards for retailers, as GE aims to sell 20% of the unit in a public offering targeted for 2014. The remaining shares will be distributed to GE's normal shareholders. This move will lead to a smaller balance sheet and less volatile earnings, but will take a toll on current earnings. To offset the lower earnings contribution, GE aims to use proceeds to a large degree to repurchase shares.

Immelt is not afraid to make bold portfolio moves to optimize the current portfolio. Earlier this year, GE sold the remainder of its 49% stake in NBC to Comcast (NASDAQ:CMCSA) in a $16.7 billion deal.

Investment Thesis

The guidance into next year does not contain any shockers, but investors seem generally pleased with the strategy to gradually wind down or significantly shrink its capital unit, while focus on the industrial activities. Note that despite the strategy to reduce the financial business, still about 30% of earnings in 2015 are expected to be derived from the Capital business.

The appealing organic revenue growth rate targeted for 2014, combined with further margin expansion seen going forward, provides a double whammy for earnings growth. Combined with modest merger and acquisition activity, share repurchases and dividends, investors should do just fine. Note that the transformation strategy will take time, obviously as a result of the huge size of the company.

Total payouts to investors remain high in the meantime. Annual dividends of about $8 billion for 2013 were accompanied by about $10 billion in share repurchases. The dividend hike announced for next year will boost total dividend payouts to the tune of $9 billion. Note that at current prices, investors in GE receive a combined "yield" of about 6.5% through dividends and repurchases.

Back in October, I last took a look at GE's prospects. The sound strategic vision, repurchases and recently hiked dividend are long-term drivers amidst organic growth and margin expansion at the industrial activities. All of this could create in nice long-term payoff for shareholders, after shares have already risen almost 30% so far this year.

While I continue to like the very long-term prospects of the business, I would not initiate a position at current levels. The current valuation at nearly 20 times earnings is a bit steep, despite targeted margin expansion and revenue expansion as guided for the coming years.

Therefore I reiterate my standing. Don't buy GE for a short-term gain, but the current strategic vision, to create a US industrial powerhouse again, could result in nice long-term payoffs for shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.