General Electric (GE) reported a decent quarter last week and while there was reason to be somewhat optimistic, investors were certainly not impressed and sold the stock down 62 cents on the news. However, we as investors must have context for such post-earnings reactions and in that vein, we'll take a look at GE with the new information we received in the earnings report and see what it means for shares going forward. I am not here to go line by line through the earnings report, as you can read other pieces here on SA or take a look at the press release linked above; we are going to examine the impact of the numbers on the company's valuation going forward instead.
GE's headline numbers, EPS and revenue, met and slightly missed expectations respectively, but with a company as complicated and diverse as GE you must dig deeper than simply looking at revenue and EPS. There were some very nice positives in the quarter and for the year; fourth quarter operating EPS was up 20% over 2012, the industrial business posted an organic growth rate of 5%, fourth quarter margins were up 100 basis points, the company has a record backlog of $244 billion in orders, and the list goes on. There were some cautious notes on the quarter as well, including missing on the full-year margin goal management had touted of 70 basis points of improvement over 2012, with the result coming in at 66 basis points for the year. The point is that the earnings report was largely a positive one, but it was also expected by the investing community.
In fact, GE shares had been flirting with multi-year highs leading into the report and with those kinds of expectations, a virtually perfect report and/or increased guidance for the next year is required to maintain momentum. GE didn't have a perfect report and also simply maintained its guidance for 2014. That wasn't enough for investors, and to be fair, it shouldn't be enough to maintain multi-year highs. As a result, we saw a 2%+ decline in shares on Friday on very heavy volume.
So what does all of this mean going forward? I've been a bull on GE since the low $20s last year because the brand is as strong as ever and the company is diversifying its way out of finance and back into industrials, somewhat reducing risk and cyclicality. In addition, the company's backlog of orders means it has years' worth of industrials revenue waiting to be taken, and as the backlog grows each quarter, it instills more and more confidence in me that GE is a great company that is continuing to grow. I even wrote a series of articles detailing each business segment GE owns and the value it provides to the conglomerate. The point is that I don't think any of that changed with the earnings report; yes, full-year margins came in 4 basis points below guidance and 2014 guidance was maintained and not raised. However, I think that is more proof that the market was expecting too much rather than GE not delivering good results.
Consensus is calling for $1.71 in EPS for 2014, and part of the problem is that this number represents less than 5% profit growth from 2013. However, analysts have EPS growing to $1.84 next year and $2 in 2016. While those are not blockbuster growth numbers, for an enterprise the size of GE, one cannot reasonably expect double-digit profit growth each year. At $28 leading into earnings, I think market expectations may have gotten ahead of what GE can deliver. After an earnings-related sell-off like what GE shares saw last week, it is important to understand why. There is a huge difference between a company that delivered a huge miss and a company that had an unrealistic buildup into earnings and delivered a decent report that wasn't up to the market's expectation. With GE, I think we've got the latter, and it is an important distinction.
At only 14.5 times this year's earnings and the terrific dividend yield of 3.3%, GE shares represent a great value stock. Easy money has been made in the stock, and those investors looking for gigantic capital gains over the next year are going to be disappointed. What GE does represent is a very cheap stock that has a below-market multiple, a condition which is completely unwarranted, and a very nice yield. GE is a great stock to add to your retirement portfolio if you haven't yet because as the order backlog and continued success of the business show, GE is going to be very profitable for a very long time to come. And as an added bonus, the continued shrinking of GE Capital means the business model has less risk inherent in it than it did a couple of years ago.
As a long-term holder, don't be alarmed at a sell-off that occurs because of one quarter that wasn't even a bad report. Expectations were simply too high, and if you still like GE and there is nothing in the report that should have changed that, consider the sell-off a gift from an overzealous Mr. Market; you can pick up your shares more cheaply now than you could a couple of weeks ago. At 14 times forward earnings and a 3.3% yield with share repurchases to boot, GE's robust, world-class business will be around for years to come and continue to put money in shareholders' pockets. As long as you can move past the dour sentiment around the Q4 report, the sale in GE shares represents a good opportunity for long-term holders.