Should You Buy GE Stock? 3 Pros, 3 Cons

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General Electric (GE) stock hasn’t been this interesting in years, but when it comes to investing, that’s not necessarily a good thing.

Should You Buy GE Stock? 3 Pros, 3 ConsThe oldest member of the Dow Jones Industrial Average is going back to its roots as a pure-play industrial stock by selling off the great majority of its financial operations.

It’s a bold — and risky — move.

After all, back in the day when GE was the biggest, most admired company on the planet — and GE stock was a hot property — GE Capital was known as the company’s secret weapon. It was the main engine of profits and allowed General Electric to beat Wall Street estimates like clockwork.

But GE Capital nearly sunk the company during the financial crisis and continues to hobble the company to this day. As one of the largest financial institutions in the country, GE Capital was designated a “systemically important financial institution,” which means its regulatory burdens are even more strenuous in these days of especially tight federal oversight.

Once GE Capital is gone, GE believes it can excel as a much smaller company. It sounds like a fine plan, but it’s going to take a couple of years to unfold, and that could keep GE stock stuck in its range-bound ways.

Does GE’s massive transformation make GE stock worth picking up? Let’s look at some of the pros and cons.

GE Stock Pros

Simplicity in Style: As a hybrid financial-industrial play, GE didn’t really fit in with either sector. For one, the market values financial stocks and industrial stocks differently. And the two segments don’t even offset each other when the business cycle turns down. The market likes clarity — that’s why conglomerates have all but disappeared — and GE will benefit from that.

Shareholder Cash: With a stable and generous dividend — currently yielding 3.5% — GE stock is a nice equity income holding. Additionally, shareholders are going to get a significant amount of cash from the sales and spinoffs of GE Capital. GE said it could get a dividend of $35 billion from GE Capital. It also pledged to buy back $50 billion in stock.

Valuation: GE stock has a reasonable to compelling valuation depending on which metrics you use. At less than 17 times forward earnings, GE stock is cheaper than the broader market, and yet it has much better long-term growth prospects. It’s cheaper than its largest competitors by book value, and trades at the sector average by price-to-sales.

GE Stock Cons

Macro Woes: Giant industrial stocks aren’t having such an easy time of it these days. From 3M (MMM) to Caterpillar (CAT) to United Technologies (UTX), global macroeconomic headwinds are weighing on results and shares. The strong dollar takes a significant bite out of revenue at these firms, but the slowdown in the Chinese economy is the real killer.

Shrinkage: GE needs to get rid of the albatross around its financial segment, but that also dooms GE to a period of shrinking revenue and dwindling profits as it sheds billions in assets. After all, GE Capital still accounts for about half of GE’s profits. GE investors have to be patient with the process, while GE management needs to show industrial strength quarter after quarter.

Make the Market Believe: GE stock has been range-bound for two years. It’s in the midst of an enormously disruptive and expensive transformation. And the macroeconomic situation — from slow growth to lower oil prices — isn’t helping. There’s nothing wrong with being cautious and you can bet the market will take a “show me” approach to GE stock.

Verdict

For the first time in several years, GE stock looks like a market beater. By turning back the clock, GE will finally put the financial crisis behind it. Given the fast progress GE is already making, it’s hard to believe GE stock won’t be much higher in three or five years than it is today.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities. 

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/general-electric-ge-stock-mmm-cat-utx/.

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