With GE's (NYSE: GE) share price having risen by 11% in the last year, investor sentiment has clearly improved towards the industrial and financial services company. In fact, GE has been able to outperform the S&P 500 by over 12% during that period as it has begun to implement the process of focusing to a greater extent on its industrial, rather than financial services, business.
We think that this transition is a majorly positive catalyst for GE's financial performance and for its share price. Above all else, the company's industrial segment is more profitable than its financial services segment and the return on capital exceeds the cost of capital for GE's industrial efforts, which has not always been the case in its financial services division. And with GE likely to continue the transition towards generating a greater proportion of sales from industrial efforts moving forward, we think that this will have a positive impact on its profit and on investor sentiment.
During this transition, GE is set to focus increasingly on organic growth. However, it is also likely to make acquisitions and we believe that engaging in M&A activity has the scope to act as a positive catalyst on the company's future performance. That's because, as the Alstom integration evidences, such deals can generate exceptionally high synergies which can bolster GE's financial performance. In fact, the Alstom deal alone is expected to deliver synergies in excess of $3bn. And with GE discussing the potential for an expansion in its leverage of around $20bn in its most recent accounts, we think that further acquisitions could lie ahead which could positively catalyze the company's share price.
As well as acquisitions, GE is also seeking to generate an improved growth outlook through greater collaboration and efficiencies within its own various divisions. This is being done through the use of the GE Store, which allows GE's different segments to utilize a central hub for idea exchange and best practice. Although a relatively simple idea, we think that it could be a game changer for GE since it could help the company's historically somewhat fragmented segments to work in unison to a greater extent.
Sure, it may take some time for the GE Store to add significant value, but with it having the potential to lower costs it could help to make GE more competitive and more nimble than a number of its key rivals. Therefore, especially as the company continues to transition towards being an industrial play, we see greater potential for the GE Store to have a positive impact on the company's bottom line and in how the investment community views the stock.
Of course, external factors may also act as positive catalysts on GE, too. We feel that the increasingly cautious outlook by the Federal Reserve could boost the financial performance of GE. That's because it is likely to cause the US dollar to weaken moving forward and with GE having major international operations, this could cause a positive currency effect on profitability. Further, with GE continuing to be viewed as a relatively stable income stock thanks to it having a yield of 3% versus 2.2% for the S&P 500, low interest rates could cause investor sentiment towards its shares to improve as investors seek out a higher income return.
Clearly, GE is not risk-free and the integration of acquisitions including Alstom could bring less synergies than previously anticipated, with delays to integration also being a possibility. Furthermore, increasing leverage means that debt servicing costs could rise as interest rates increase over the medium to long term. And as interest rates rise, the scope for positive currency translation could be somewhat reduced and GE's dividend appeal may subside while other interest-producing assets become more appealing.
However, with GE having a number of positive catalysts including the use of the GE Store, a sound strategy through which to transition to being a more focused industrial player, M&A potential, as well as being in a position to benefit from a more dovish Federal Reserve, we think that now is the right time to buy it.
If you like what you've just read, consider clicking the "Follow" link at the top of the page (next to where it says 'Team Money Research') to receive an email notification when we publish a new article.
Disclosure: I/we 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.