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Summary

  • This stock remain cheap at around $26 per share. The stock, trading at a forward P/E 21 is trading at just 14 times fiscal 2015 earnings of $1.82.
  • Management is executing on both its global growth strategies and productivity initiatives by reducing costs.
  • With future growth drivers in place such as GE's strong industrial portfolio and energy infrastructure businesses, these shares should reach $32 in the next 12 to 18 months.

General Electric (NYSE:GE) has not been a favorite among investors lately, but the company's first quarter results, which preceded questions about the tenure of CEO Jeff Immelt, proves that you can't keep a good company down. Although this company has not performed up to its usual standards, management has not pretended as if it has.

Despite these talking points, I reminded investors recently that General Electric has not performed as poorly as some of the rumblings suggested. 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 operation. Last week, these recent moves culminated into an excellent quarter, which have silenced several of the company's critics.

For the first quarter, General Electric posted a 12% rise in overall industrial profits. The company's strength in businesses such as jet engines, gas turbines and oil industry equipment offset weakness in areas such as transportation and healthcare. Excluding one-time items, the company delivered operating earnings of 33 cents per share, topping average estimates of 32 cents per share.

Last week, I pointed out that GE's performances, although uninspiring, have compared favorably to other large conglomerates like Honeywell (NYSE:HON) and Dover (NYSE:DOV). Thursday's results was yet another example - particularly from the standpoint of profits.

In terms of revenue, there was a 2% decline to $34.18 billion, which slightly missed estimates of $34.36 billion. The big story, however, was the progress management is making in transitioning the business from its financial unit to establish more of a focus on GE's traditional manufacturing businesses. The latter segment, which posted 8% revenue growth, is by far GE's strongest.

In fact, the company posted 14% revenue growth in both aviation and power/water segments, its two largest industrial businesses. GE's oil and gas division posted a 27% revenue increase. As strong as these numbers appear, I don't believe management, particularly Immelt, has gotten enough credit.

Given the breadth of GE's end-markets, which it has achieved from various acquisitions, there have been complaints about GE's weak organic growth. This is the metric that measures a company's operational performance using only internal resources and excluding events like acquisitions.

For the first quarter, General Electric delivered organic growth of 8%, twice the average estimate, which was for growth of 4%. What's more, that the company posted a profit margin of 13.4%, which expanded by 50 basis points, suggesting that management's decision to focus on its industrial segments is paying off.

This demonstrates how well management is executing on both its global growth strategies and productivity initiatives by reducing costs. Equally and perhaps more importantly, GE is no longer reliant on its weak GE Capital finance unit. And when you factor in the confidence shown in management's guidance, which calls for 10% growth in industrial profits, this is a company that is operating on all cylinders.

From an investment perspective, this stock remain cheap at around $26 per share. The stock, trading at a forward P/E 21 is trading at just 14 times fiscal 2015 earnings estimates of $1.82. Assuming that the Industrial segment can post long-term revenue and free cash flow growth of 5% and 10%, respectively, investors would do well buying this stock and being patient.

As I said recently, with future growth drivers in place such as GE's strong industrial portfolio and energy infrastructure businesses, these shares should reach $32 in the next 12 to 18 months. This is also assuming a return to the low teens in free cash flow margins.

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.

Source: General Electric Makes A Power Play