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Summary

  • General Electric posted solid earnings results this morning driven by its industrial businesses.
  • The company continues to transition to a pure play industrial concern which should be awarded by a slightly higher multiple by the market.
  • General Electric continues to be a core part of my income portfolio due to its solid dividend yield and reasonable valuation.

General Electric (NYSE:GE) posted earnings this morning that beat expectations. Earnings are also getting a lot of play due to the strong results from its industrial businesses. Industrial revenues were up 8% Y/Y. Industrial profits posted even better results rising 12% Y/Y with margins improving 50 bps. GE was able to beat the consensus by a penny a share thanks to this growth.

Jim Cramer has called out these results several times on CNBC this morning. The Maestro of Mad Money has called this quarter for GE "the beginning of its industrial break out." He further states, and quite correctly, that GE is in the two hottest parts of the market right now; Aerospace (jet engines) and Energy (expanding energy services business).

General Electric's CEO Jeff Immelt (who probably is under less pressure after these results) stated during the conference call that "we are on track for our Retail Finance IPO and remain committed to a GE that has 70% of our earnings from the industrial businesses."

The spin-off of the company's U.S. based consumer finance business later this year should be well received and move the company further down the path to be more of a pure play industrial concern which should be awarded with a slightly higher multiple in the market.

I have had General Electric as a core holding in my income portfolio for over a year due to its robust dividend yield and because I think it has solid capital appreciation potential throughout the rest of the year as it transitions to be an industrial concern.

The shares yield 3.4% and the company has raised its dividend by 120% since re-emerging from the financial crisis. Based on recent history, the company should announce another dividend hike near the end of 2014.

I would look for the company to further expand its energy services businesses via acquisitions especially after it spins off its U.S. finance business. The shares sell for ~15.5x forward earnings, a slight discount to the overall market multiple. Pure play industrial concerns like United Technologies (NYSE:UTX) go for 17x to 18x forward earnings. GE will continue to be a core holding in my portfolio. It is not a home run stock but should provide solid returns in the year ahead. Accumulate.

Source: General Electric: The Beginning Of The Industrial Breakout