General Electric's (GE) stock price has seen considerable volatility since the start of the year - the stock price has been up and down and at the moment, it is trading below its value at the end of the year. The stock has lost more than 8%. However, over the last few days, the trend has changed and the stock has gained some of its lost value. Nonetheless, the stock price remains below the end of year price. In my opinion, this presents a buying opportunity for the long-term investors as I see considerable upside potential and growth opportunity for the company. I expect GE to grow its business substantially over the next few quarters and the stock should be trading at considerably higher than the current price levels. At current price levels, General Electric is very attractively priced and the investors with a long investment horizon should definitely consider it.
Aviation Business Set to Give a Boost to Revenues
GE's aviation business is the second hottest element in terms of growth following oil and gas according to the most recent annual results reported by the company - this segment has achieved 13% growth in revenues as compared to the last year. Moreover, the company has also managed to increase its profit margin for this segment during the last year. The profits for this segment have increased 20% giving the company a 7% increase in spread. In the next two years, aviation business is expected to show huge growth. Single aisle planes account for over 60% of the commercial airplanes flying at present. Same jets are expected to make up for 70% of the new 35,000 commercial airplanes to be delivered in the coming twenty years. We are talking about a market worth roughly $2.3 trillion.
Unfortunately, the competition in the market is also fierce. GE and Safran's joint venture, CFM International, is in direct competition with Pratt & Whitneys, a unit of the United Technologies Corp (UTX). CFM's engine is the only option on 737 MAX, which gives GE advantage over Pratt and Whitney. However, the rival has its GTF (Geared Turbo Fan) engine which is an option in the A320neo, posing a challenge to CFM. As of January, both the competitors are going with the same speed. Out of the 2610 engines sold, both the rivals account for 32% each, giving them equal market share. The market still has to offer a lot. The remaining 1880 engine orders worth $20 billion are still up for grabs.
Even if CFM manages to maintain its market share, we are looking at $6.4 billion of additional revenue backlog from aviation business this year - Aviation business had total revenue of $6.1 billion during the last year.
A New Window for Revenue Growth and Trades by Insiders
GE capital has been facing increased competition in aircraft leasing services. While it is still the world's largest facility for aircraft leasing, the company is planning to add helicopter leasing to its portfolio of rental assets. Helicopter leasing is widely used in oil and gas industry. As the market grows, the demand for helicopter is also rising. Although, no final decision has been made yet as to whether the company would go ahead with the helicopter leasing plan, still it presents a new opportunity to counter the increased competition in aircraft leasing.
Most of the company's secrets are kept within the upper management. In other words, they know precisely where the company is headed, its opportunities and its threats. Therefore, when an insider buys its own stock, it means the stock is either highly undervalued or the company is headed towards growth. Similarly, Jeffery R. Immelt, chairman and CEO of GE, have bought shares worth over $1 million at the end of January. Furthermore, Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) is also buying shares worth around $297 million dollars.
General Electric has considerable diversification in its business segments, which gives its earnings stability. The focus on the industrial segment is again fueling the growth in earnings, and at the same time, the financial segment, GE Capital is also making solid recovery. However, the overall size of the GE Capital is being reduced by the company. In order to read the details of the strategy please follow this link. As a result of a better mix between these two segments, the future growth of the company looks a lot more secure than the past. In my opinion, General Electric is undervalued at the moment and the stock should move higher over the next twelve months.