General Electric (GE) started the year fairly well, rallying more than 10% in the first quarter. After that, the stock moved downward by about 5% and it's been trading in a tight range in the last couple months. Recently the company decided to increase its presence in China and I believe that this is great news for investors in the company.
Today GE announced opening a new R&D center in China. This new center will allow the company to build stronger ties with the consumers in the continent of Asia. Because the culture is different in Asia compared to North America, the needs and priorities of the people in this part of the world will not be identical to those in North America, and the company will benefit greatly from this R&D center. This is going to be the company's second R&D center in the country, and I don't expect it to be the last one either. GE is embracing the aspect of being closer to its consumers and the company will continue to invest in China as it will see a significant portion of its growth there. In the next few years, the company is expected to see negative growth in North America and double digit growth in Asia.
In the new R&D center, the company's engineers will take input from local costumers in designing and developing new products. This will enable the company to build products specifically targeted for the local people. The consumers will be able to visit this center and "try out" the products in development to provide feedback. The R&D center's initial focus will be in medical, energy, transportation and telecommunication industries. In the later stages, more industries will join the focus of the center. Focusing on consumers, their needs and feedback will give them the message that the company values and cares about them. This will increase customer loyalty in time, which is something hard to get these days.
Recently, GE spent $535 million to buy shares of China XD Electric after negotiation for 2 years for the deal. GE will own 15% of XD Electric as a result of the agreement. This is a great deal for GE as the company will have access to China's electrical infrastructure as well as be able to market its products to consumers of XD Electric. Also, the two companies will form their own company in China and GE will own 40% of this company. Because of this agreement, GE will enjoy a great advantage over many other North American and European competitors that have been trying to increase their presence in China. The country presents great opportunities as economies in the developed nations are expected to see zero or negative growth in the next few years.
GE is expected to earn $1.55 per share this year and $1.70 in 2013. The company's current P/E is 16 and forward P/E is 12. GE is currently trading at around $19 and consensus price target on the company is $24, offering it an upside of 26%. Also the company offers an attractive dividend yield above 3.5%. The company's cash flow and cash reserves make it more than likely that the dividend yield will be sustained if not increased even further in the long term. The company's growth prospects in the healthcare industry might be hurt due to austerity measures in Europe, however its prospects in aviation and infrastructure industries will more than make up for any loss in this industry.
I like the fact that GE is taking action in Asia to make up for slowing growth in North America and Europe. The company is proactive about making sure that its investors will see sufficient return on investment. The company is working on increasing its margins and it's been one tough part of the business but I still consider GE as a successful company and a relatively safe bet, even though there is really no safe bet in the stock market. GE is one of the companies you might want to buy if you want your portfolio to gain exposure to China but don't feel safe about buying Chinese stocks.
Disclosure: I am long GE.
