Why General Electric Is Heading To $32

Apr.16.14 | About: General Electric (GE)

Summary

GE has not performed as poorly as some would like to believe.

CEO Jeff Immelt has done a respectable job ridding the company of poor-performing businesses like the company's GE Capital segment, while transitioning GE to become more focused.

Assuming that the Industrial segment can post long-term revenue and free cash flow growth of 5% and 10%, respectively, these shares should reach $32 in the next 12 to 18.

There have been complaints that Dow component General Electric (NYSE:GE) has not performed up to its usual standards. With growing concerns about soft margins and disappointing results in GE's Industrial business, the Street has begun to wonder if long-time CEO Jeff Immelt is still the right person for the job.

But GE has not performed as poorly as some would like to believe. Immelt has done a respectable job ridding the company of poor-performing businesses like the company's GE Capital segment, while transitioning GE to become more focused.

I will argue that when compared to other large conglomerates like Honeywell (NYSE:HON) and Dover (NYSE:DOV), General Electric has been a standout performer, especially from the standpoint of revenue growth and profits. And with future growth drivers in place such as GE's strong industrial portfolio and energy infrastructure businesses, investors would do well taking a gamble on these shares ahead of the company's first-quarter report Thursday.

Even though analyst expect an 18% dip in earnings, there continues to be improving factor to offset weak profits going forward. The consensus estimate is 32 cents per share, down from earnings of 39 cents per share a year ago. With concerns about Immelt's tenure, estimates have come lower by 4 cents over the past three months. For the fiscal year, analysts are expecting earnings of $1.69 per share.

In terms of revenue, the Street will be looking for a 2% dip to $34.41 billion. Last year, GE posted revenue of $35.01 billion. For the year, revenue is projected to come in at $150.06 billion. Despite the expected dip in revenue, it's worth noting that General Electric has averaged 2% year-over-year revenue growth in the past four quarters, including a 15% surge in the January quarter.

Bears still seem unimpressed by the growth results. Arguments have pointed to the rate at which GE does deals to grow in various end-markets. Recently, the company's organic growth has come into question. This is even though the company has beaten earnings estimates three out of the last four quarters. Not to mention, increasing its backlog to a new record high.

Organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions, is an important metric used to gauge performances of companies that are so well diversified like GE. The idea is that companies like GE have grown by going the M&A route (merger and acquisitions). But GE's results have demonstrated that management is doing well executing on its global growth strategies and productivity initiatives.

I do realize that it sounds like I'm raising the pompoms a little bit for GE. But I don't believe management has gotten the credit it deserves for growing one of the true conglomerates that remain in this market. And this includes rivals like Dover and Danaher (NYSE:DHR).

While I'm not ready to proclaim GE stock, which carries a P/E of 21 as cheap, management can still harvest value from these operations. Assuming that the Industrial segment can post long-term revenue and free cash flow growth of 5% and 10%, respectively, these shares should reach $32 in the next 12 to 18 months. What's more, the valuation aligns with both Honeywell and Danaher.

As it stands, GE shares remain a bargain at around $26 per share. And investors would do well betting on a little excitement that is likely to come in the next 12 to 18 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.