With General Electric's (NYSE:GE) stock up 33% in 2013, not including the dividend, the former mega-cap SP 500 growth stock leader of the 1990's returned to some of its outperformance glory last year, despite what looks to be 8% earnings per share (EPS) growth and -1% revenue growth (assuming current consensus is met) for full year 2013.
When GE reports their calendar 4th quarter 2013 Friday morning, January 17th, 2014, analyst consensus is expecting $0.53 on $40.2 billion in revenue for expected y/y growth of 20% and 2% respectively.
Q4 13 estimates have been stable since the October earnings report.
For 2014, analyst consensus is expecting $150.2 billion in revenue driving $1.64 in full-year EPS for expected growth this calendar year of 3% and 8% respectively.
As we wrote here and here in August and October '13, Jeff Immelt is under tremendous pressure to try and re-create the business model of GE, and try and assuage shareholders who become very restless of the company's performance.
The recent announcement last fall about GE's decision to spin-off the retail credit operation was a positive one, and the 3rd quarter earnings report showed surprisingly strong margin expansion and industrial order growth.
However the continuing problem child is GE Capital, once a formidable strength in the 1990's, is now a segment that GE actively talks down and yet GE Capital is still roughly 25% - 33% of GE's total operating income.
Since we primarily look at cash-flow in terms of our valuation work, GE Industrial (the non GE Capital component) generates about half of GE's total cash-flow currently ($15 of the $28.5 bl TTM cash-flow as of 9/30/13) but almost all of GE's free-cash-flow ($11 bl of the $13 bl in free-cash-flow as of 9/30/13.)
The last 5 years, assuming GE's consensus revenues are met, GE will have driven average revenue growth of -4% and not one of those years saw a positive revenue growth year. Here is the last 5 year's detail:
- 2013 (est) -3%
- 2012 - 0%
- 2011 -2%
- 2010 -4%
- 2009 -14%
Trading at 17(x) and 16(x) 2013 and 2014 EPS for expected growth this year and next of 8% and 4%, GE is fairly valued on just about most metrics.
At 9(x) cash-flow with a 5% free-cash-flow yield, the stock is neither incredibly enticing or repulsive on a valuation basis.
Morningstar's intrinsic value on GE is $27 per share while our internal model values GE closer to $34 - $35 per share.
Summary/Conclusion: technically the stock looks fine, with support at the 50 day m/a at $27 and then again at the 200 day m/a just under $25.
In terms of where top-line growth comes from, the "industrial internet", 3-D printing and the increased interconnectivity between GE's installed machinery base is expected to be a big driver of growth and margins. (This reminds me of some of the buzz speak being thrown around regarding the internet and tech in the late 1990's. It is "soft" vision and more concept driven than concrete, but that is just an opinion. )
A return to global growth would definitely help GE and we are starting to see the first signs of that for sure. The US, Japan, Western Europe and (we were hoping) China would help the Industrial businesses.
GE had a great 2013, despite GE Capital weighing like an anchor on the stock. My own opinion is the business is permanently hobbled with GE Capital as a SIFI (strategically important financial institution) and the great asset (no pun intended) that GE Capital was in the 1990's, is now a liability. GE Capital is constrained in its growth, which means GE is constrained in its growth.
Top line i.e. revenue growth is completely absent as well.