General Electric: More Positives For The Stock

Mar.17.14 | About: General Electric (GE)

Summary

Decision to spin off consumer credit division gets positive initial response from investors and analysts alike.

Massive insider purchases and technical indicators are short-term catalysts for the stock.

Price targets and dividends promise 10% annual returns.

Is this turnaround for real?

This article about General Electric (NYSE:GE) was published two weeks ago, highlighting some positives for the stock. Since then there have been more positives. Hence, this article covers new positive aspects as well as enhancements to the points covered in the previous article. Let us get into the details.

More Serious Insider Buys: To quote Peter Lynch, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." It certainly seems to be the case at General Electric as the last 6 insider transactions have all been buys. The latest (and most powerful statement) was from CEO Mr. Immelt who spent his entire cash bonus on buying the stock. While any insider buying is a positive, a purchase from the CEO or CFO warrants much more attention.

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(Source: Yahoo Finance)

Price Targets And Analyst Support:

  • According to 17 analysts, General Electric's average price target is almost $29. That represents an upside of 15%, without including dividends.
  • The price target represents a forward multiple of 17 based on 2014 expected earnings per share of $1.70.
  • Jim Cramer recently talked about the stock positively on his show. While investors might not agree with Mr. Cramer all the time, there is no denying that he has his followers. He calls the stock "a long-term buy."

GE Capital: This topic was touched upon in the original article linked above. Since then, we've had more details become public about General Electric's plan to spin off its retail financing unit as a separate entity.

  • Analysts are calling this move a net-positive but obviously not a real game changer. But a positive nonetheless as the company plans to exit the troubled consumer credit business.
  • Analysts say this should boost the stock price, as the perils of consumer spending are still fresh from the 2008/09 days. GE Capital accounted for 40% of the earnings in 2013, and with this move, the CEO expects this number to go down to 30%.
  • If history is an indicator, investors have usually done well holding on to spin-offs (if they receive any shares from the spin offs).
  • Speculative Positive #1: If General Electric maintains its dividend per share after the spin-off, the stock's yield will be much higher. All things being equal, when the credit unit is spun off: a) market cap will go down b) stock price should go down an equal amount as this particular entity's (General Electric) value goes down.
  • Speculative Positive #2: General Electric is expected to get around $4 billion for its 20% ownership of the new "Synchrony Financial" entity. Investors are already hoping/guessing that this money will be used for share buybacks, as can be seen in this article.

Letter to Shareholders: General Electric published its latest letter to shareholders last week. The letter had several positives that investors can look forward to. Below are some key highlights:

  • General Electric expects the industrial division to contribute 70% of the company's earnings, with an expected profit margin of 17%. This goes hand in hand with the company's move to reduce its exposure to the consumer credit division.
  • The company returned $18 billion to shareholders in 2013 and this number is expected to go up to $90 billion by 2016.
  • The company plans to integrate more of its administrative services. This move is expected to result in saving $4 billion and also bring the administrative costs to 12% of revenue.

Technical Indicator: At the time of the original article linked above, General Electric's Relative Strength Index [RSI] was just getting below 40. As of this writing, the RSI is at a much lower 33. Fans of technical indicators are well aware that a RSI of 30 and below indicates an oversold condition. Value/dividend investors who also look into technicals usually make use of such conditions to buy more of a stock they like.

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(Source: Nasdaq.Com)

Conclusion: Detractors continue to look at the 2008 crisis as the main reason to avoid General Electric. The CEO has his share of critics as well. But the stock's positives are hard to overlook:

  • Yield at 5 year highs
  • Massive insider support
  • Support from analysts
  • A positive initial response to the spin-off decision, which will continue General Electric's transformation

So, where do you stand with respect to General Electric ? Please leave your comments below.

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.