Stripped Of GE Capital, GE Looks A Lot Like The SP 500

| About: General Electric (GE)

Summary

Energy is a big part of "New GE" so the bounce in crude oil is not unwelcome although the "Energy" segments takes various forms.

Operating Cash-Flow per share (OCFPS) makes valuation look a lot more reasonable.

It will be all about "execution" in late 2016 and 2017 for Industrial GE.

GE (NYSE:GE) reports their Q1 '16 financial results before the opening bell on Friday, April 22nd, 2016. Analyst consensus per Thomson Reuters is expecting just $0.19 in earnings per share on $27.67 billion in revenue for expected year-over-year (y/y) declines of 37% and 6%.

The 6% revenue decline will be the smallest decline in a year, although calendar and GE's financials are riddled with the impact of divesting GE Capital and trying to interpret what is really happening under the hood.

It was Q1 '15 almost one year ago today where GE announced that GE Capital was going to be divested so as we move through 2016 investors will get a better feel for the true operations.

I've asked Thomson about this unique circumstance directly and it is one of the few companies where I've ever seen this occurrence and I've been following this data since the year 2000, but Thomson does not publish quarterly GE earnings estimates for 2017, and just started posting 2016's quarterly numbers. When I inquired as to the reason, Thomson said that the Street was not publishing quarterly estimates on GE.

Does that indicate a lot of uncertainty around GE's quarterly consensus ?

After reviewing Q4 '15's revenue and operating income here is what "New GE" looks like with a diminished GE Capital:

Revenue: %
* Energy Related 46%
* Transportation related 25%
* Health Care related 15%
* Appliances/Lighting/Housing 7%
* GE Capital 8%
100%
Operating Income:
* Energy related 62%
* Transportation related 49%
* Health Care related 24%
* Appliances/Lighting/Housing 6%
* GE Capital -41%
100%
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Source: Q4 '15 earnings report and detail

While the new GE Commercials talk about Predix (I have no idea what that is) which is described as the new operating system for industry, just about every segment of GE's business touches the 10 sectors of the SP 500.

You could make a case that GE is a new "smart-beta" index ETF.

Valuation: the plain fact about GE's forward annual estimates is that GE is now one of the few places in the SP 500 where you might expect double-digit earnings growth for the next few years, without taking high-tech or biotech risk.

3/31/16 (est) 12/31/15 9/30/15
2018 EPS est gro 15% 14% 14%
2017 EPS est gro 17% 17% 19%
2016 EPS est gro 15% 15% 18%
2018 est rev gro 4% 5% 8%
2017 est rev gro 0% 0% 3%
2016 est rev gro 8% 9% 8%
Click to enlarge

Source: Thomson Reuters earnings per share (NYSEARCA:EPS) and revenue estimates as of the reporting date for each quarter

How is GE expected to generate double-digit earnings growth on expected 4% average revenue growth rate over the next three years?

Well, if you listen to the Trian guys, there is a lot of room for GE to expand margins. The math works if that is the case, but if you look at the above numbers, that margin expansion might already be built into expectations. Here is a Seeking Alpha article that discusses the underperformance that Trian might be targeting with "newco".

For years GE has separately disclosed their GE Industrial cash-flow information. Looking strictly at the GE Industrial cash-flow, here is GE's "operating cash-flow per share" (OCFPS):

GE Indus OCF GE OCFPS

Indus

FCF yield

2015 $16.3 bl $1.66 5%
2014 $15.2 bl $1.51 4%
2013 $14.2 bl $1.41 4%
2012 $17.9 bl $1.70 6%
2012 $12.0 bl $1.14 5%
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  • GE Indus - Ge Industrial segments or GE ex GE Capital
  • OCF - operating cash flow
  • OCFPS - operating cash-flow per share
  • FCF yield - free-cash-flow yield which is 12-month trailing free-cash-flow divided by GE's current market capitalization

Summary / conclusion: Having been critical of Jeff Immelt in the past (here and here) and not moving quickly enough in the post-2008 world to re-position GE, I was wrong to criticize as Jeff has gotten some good value for GE Capital and the company seems energized for the 21st Century.

The activist investor Trian and margin expansion look to be the key metrics to watch going forward.

However, IF (and it sure is a big if) global growth returns, with Europe starting to pick up and Energy stabilizes, and GE can drive revenue growth, then GE the stock can see some additional catalysts for P.E expansion, or just plain old fashioned earnings growth.

The stock will be a work-in-progress for at least another year, but the presence of Trian in my opinion keeps the risk-reward favorable, plus investors get the benefit of a lot of sectors housed under one roof.

GE has moved into one of client's top ten positions over the last year. $2.00 in EPS looks like "peak EPS" for now, which also happens to be the 2018 consensus EPS estimate for GE.

A lot of the realignment and divesting of GE Capital is done: now execution and organic growth will be watched carefully.

We would look to add to positions under $30 on any decent pullback. GE just traded above its "200-month" moving average (that is a long time) for the first time since late 2008.

Click to enlarge

Disclosure: I am/we are long GE.

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.