Over the course of the last year, shares in GE (NYSE:GE) have risen by 20%. This easily beats the S&P 500's gain of just over 2% and while some investors may be concerned about profit-taking following a period of outperformance, we're still bullish on GE for these 3 reasons.
Clearly, GE is undergoing a period of major changes as it seeks to move away from financial services and towards becoming a more focused industrial company. We think this move will positively catalyse the company's earnings and share price for a couple of reasons.
Firstly, now that GE is no longer considered a systemically-important financial institution, it has far more flexibility regarding its balance sheet. This could allow it to return more cash to shareholders, or even increase its leverage to engage in acquisitions to boost its top and bottom lines. In fact, GE's CEO discussed in his letter to shareholders the possibility of increasing the company's leverage by as much as $20 billion, which we think could boost its earnings and share price through acquisitions moving forward.
Secondly, we also think that GE's restructuring will positively catalyse its share price because the industrial space is far more lucrative and profitable than the financial services arena. For example, GE's return on capital in financial services failed to match its cost of capital, while the inverse situation exists in its industrial segment. This shows that while the pivot towards industrial products and services may cause a degree of short-term pain and uncertainty for GE, in our view, it has the potential to positively catalyse its earnings and share price moving forward.
Internet of Things
Within the industrial segment, we're also bullish about GE's move into the Internet of Things, and feel that this will boost its sales, profit and share price moving forward. The digital internet has huge potential in our view and while data is currently relatively widespread, using that data to allow companies and individuals to become increasingly efficient could prove to be key to the success of the Internet of Things in our opinion.
With GE squarely focused on providing usage for that data through its Digital Twin strategy, we think that it will occupy a commanding position within what is set to become a fast-moving market. For example, GE is utilizing over a half million different types of machine to create digital profiles which save on emissions and also flag up servicing requirements as it seeks to add value through making its customers increasingly productive and efficient. In our view, this is a key growth space for the company and will lead to improved profitability, which will positively impact the company's share price.
As well as improving the efficiencies of its customers through its Digital Twin strategy, GE is also seeking to improve its own efficiencies. The company will seek to pool ideas and best practice to a much larger degree than it has done in the past, with a new central hub set to make it easy for R&D undertaken in one part of the business to be used elsewhere within the business. This should allow GE to become increasingly competitive on costs versus its rivals, since R&D spent in one part of the business could be used multiple times for multiple products in other parts of the business.
While this idea of sharing best practices, ideas and R&D throughout the business has always been present, GE's conglomerate structure has complicated the process in our view. Now that GE is an industrial-focused company with greater financial flexibility and a more streamlined organisational structure, we think that greater efficiencies will follow and that they will positively catalyse its earnings and share price moving forward.
While GE's significant international exposure improves its geographical diversity and reduces its risk profile in our view, it also means that the company could be hurt by a strengthening US dollar. That's because while the UK, EU, Australia and other major currencies are expected to weaken due to Central Bank action, the Federal Reserve is due to raise interest rates to 2.25% by 2020. This means that the US dollar is expected to strengthen versus the euro, yen and sterling moving forward which is likely to create a negative translation effect on GE's earnings.
Despite this risk, we remain bullish on GE's share price prospects. In our view, the impact of greater collaboration and efficiency from idea sharing within the company, its new structure which focuses on the more profitable industrial space and gives it greater financial flexibility, as well as the growth prospects within the Internet of Things will be significantly positive and will catalyse GE's share price moving forward.
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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.