- Fundamentals of the company are attractive, and it is outperforming the sector.
- The order backlog of the company is continually growing.
- The financial strength allows GE to raise cash at extremely low rates.
General Electric (NYSE:GE) has been performing well, and its capital allocation plan along with a shift in the strategy is paying off for the company. We are seeing more capital allocated towards the industrial and energy assets rather than the financial segment. In fact, the company has been trying to trim its financial segment (GE Capital). I believe this is the best time to focus on the industrial and energy assets as the global economic recovery is gathering pace, which will allow GE to derive rapid growth. Furthermore, I believe there is a lot of potential in the stock, and it will continue to grow. General Electric has been outperforming its industry (mentioned below in the fundamentals section), and I believe the stock is undervalued at the current price levels.
Continually Growing Order Backlog
GE recently revealed its new orders of wind turbines in Europe which shows a considerably increased order backlog for 2014. In Germany, the company has secured orders of 110MW of wind power for its 2.5-120 turbines, which will be divided into eight wind farms. Aside from Germany, GE will further deliver 27 of its 2.85MW turbines in France. The German project is already under construction, and it will soon start to contribute towards the top-line of the company. The cost of the project varies, and it depends on a number of factors, including transportation of the turbines, project size and the capacity. Nonetheless, the project will add to the already impressive order backlog of the company.
At the end of 2013, the revenue backlog from the energy management segment was $4.6 billion. Energy and Aviation segments are the main growth drivers for the company, in my opinion. As I discussed in my previous article, the aviation segment is expected to see robust growth with the new orders - at the same time, the energy segment is also seeing rapid growth, which should enhance the top-line as well as bottom-line of the company.
Exploiting the Debt Market
The perks of being GE are that everyone wants to loan you money when you decide to borrow. General Electric has been exploiting the historical low rates by issuing new debt, and the credit ratings of the company have helped it raise cash at extremely low levels. GE has decided to raise about $3 billion debt -- $2.25 billion in 30-year bonds and $750 million in 10-year notes. The important thing to note here is that the debt was offered by the parent company, not by the financial arm of the company. As a result, it generated massive interest from the investors, and the offering was oversubscribed in no time. In less than 45 minutes, the order book was oversubscribed and it has orders in excess of $11 billion.
It is not clear what the company intends to do with the proceeds from the debt issue. It looks like the management decided to dip into the debt market by issuing long maturity bonds and notes keeping in mind that the rate may soon start to go up. The majority of the debt for GE comes from GE Capital, which uses most of its debt to finance its assets. The decision to raise cash at low interest rates will certainly help the company in the future. There is also speculation that the company may use this cash to pay higher dividends or buy back shares. However, I do not think that the debt issue was necessary to finance the buyback, as the company has substantial room in its free cash flows. At the end of the last year, free cash flows for the company stood at over $15 billion - dividends for the same period were close to $8 billion. I believe an increase in dividends could easily have been financed by internally generated cash flows.
Fundamentals are Attractive
Despite an increase of over 30% during the last year, the stock still trades at a discount compared to its industry. The price-to-earnings ratio of GE stands at 17.6 compared to the industry average of 20.4. Furthermore, the forward P/E of just over 14 makes it even more attractive in my opinion. Two other metrics that should be considered are the operating margin and net margin - GE's operating margin currently stands at 18%, compared to the industry average of 13.8%. Its net margin of 8.9% also beats the industry average of 8.5%. GE is performing better than the sector, and the fundamentals indicate that the stock is currently undervalued. In my opinion, the stock should continue to move towards its fair value, which I believe is higher than the current price of the stock.
As I have mentioned above, the fundamentals of the company are strong, and further growth in its top-line as well as bottom-line should enhance its metrics. I am optimistic about the prospects of the company due to its focus on its core strength i.e. industrial segment and the recovering global economic environment. I believe GE is attractively priced, and the current price level is a very good entry point for the long-term growth seekers.