Should I Buy or Sell General Electric (GE) Stock? 3 Pros, 3 Cons

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General Electric (GE) used to be one of America’s most dependable companies. And GE stock has made tons of people wealthy over the decades. However, anyone who held on too long had a rough 10 years. Shares that peaked in 2007 above $40 fell briefly to below $6 during the financial crisis. Eight years later, shares would finally get back to the low $30s — still leaving investors with losses mitigated only by small dividends as a reward for the sleepless nights.

General Electric GE

But the worst of the storm has passed. The company has gotten rid of most of GE Capital and re-orientated the company back to the more traditional business lines that originally made the company a great success. Is General Electric stock now a buy?

Stock Pros

New Direction, Immelt Coming Into His Own: GE stock has been a poor performer since 2007, barely treading water over the past decade. The company’s historical reliance on finance and leasing operations used to be a profit center, but nearly sunk the company during the financial crisis. Since then, GE has been limping along, trying to repair its reputation, win back customers, and restore investors’ trust.

Jeffrey Immelt, the current GE CEO, has been forced to live in a pitiful shadow of Jack Welch, the larger than life CEO who had built GE stock into the cornerstone of many investors’ portfolios. However, with the recent spinoffs, sales, and acquisitions, GE has repositioned itself back into being a more traditional industrial company. Once the strategic positioning is complete, GE will finally be able to grow in a more normal manner without the bad memories lingering from the past.

Acquisition Opportunities: The industrial sector of the S&P 500 has been hard-hit over the past year. With the strong US dollar hurting domestic exporters and slowing demand from China and emerging markets, industrial stocks have plunged over the past year. Earnings have fallen and valuations have compressed. This is a great time for GE to go shopping and pick up some nice bolt-on pieces for the conglomerate going forward.

GE stock should benefit in the future from the extra flexibility gained from unloading non-core and underperforming assets in recent months. Most recently, it managed to get a rather surprising $5.4 billion for its appliances division. The Chinese bid topped, by a wide margin, the $3.3 billion offer that GE had previously been fielding from Electrolux.

In a much bigger move, GE unloaded roughly $26 billion in real estate assets to Blackstone (BX), continuing its move out of finance. GE has managed to shed the systemically important financial institution tag, freeing it from heavier government regulation and helping lift lingering bad investor sentiment regarding General Electric stock since its near-collapse in 2008 due to bad financial bets.

Iranian Market Opening: Long-standing sanctions against the Iranian government are being lifted early this year. The country currently has around $150 billion in frozen international assets. Once much of these funds are liberated from capital controls, Iran plans to begin an aggressive investment agenda to modernize the country. Among areas that will be in focus are the country’s electricity and transportation sectors, offering substantial potential for GE products.

GE stock may be a particular winner from the Iranian development, since the company had a special relationship with Iran during the sanctions. While almost all US companies were unable to sell products there, GE’s healthcare division received an exemption from the sanctions and was able to transact with the country. GE may be able to use this pre-existing goodwill to scoop up more contracts and business as the country opens. The prize is, it would seem, the country’s oil and gas sector, which will now be opened to foreign oil companies. GE should get a solid chunk of any new business generated in the sector, though higher oil prices would be helpful in driving more spending in this area.

Stock Cons

Economic Headwinds: Roughly one quarter of GE’s revenues come from the oil & gas and transportation sectors. Both of these have been under heavy fire over the past year. Oil’s drop has crushed the energy industry. Transportation is also suffering. The Baltic Dry Index, which tracks shipping rates, has hit all-time lows. Railroad stocks have gotten whacked as volumes have declined, particularly for coal. And trucking stocks have also struggled.

GE stock has significant exposure to the rails in particular, since GE is a major producer of freight and passenger locomotives. It also has exposure to mining equipment. Gold mining shares hit multi-decade lows recently, this is another sector that will be a drag on earnings over the next year. And the oil and gas sector, which GE has plowed more than $14 billion into since 2007 via acquisitions, is in an historic slump.

There are two silver linings to mention here on the energy topic. First is that much of the oil and gas business is in services that are more recurring in nature and thus somewhat less hit by falling oil prices. Secondly, General Electric stock has significant upside to lower oil prices through its jet engine business that should fare better as airlines enjoy lower fuel prices to enlarge and modernize their fleets.

Dividend Hikes On Pause: GE stock is unlikely to offer investors significantly rising dividends for quite awhile. The company has divested most of its financial assets, and these were capable generators of cash flow with which the company could pay dividends. Management has said that the dividend will be frozen until at least 2017, and even after that point, the rate of dividend growth is likely to be fairly low.

The company’s current 92 cent dividend is reasonably covered by the earnings leftover by the industrial division. However, it will take the company a couple years, most likely, to really get its footing with the radically reshaped corporate organization. The economic headwinds for the company’s now heavily industrial business lines will also limit profit growths in the intermediate term. The current 3.2% yield on offer is reasonably attractive, but don’t expect any big raises in the near term.

Expensive Compared To Peers: GE stock looks expensive when compared to those of its industrial peers. Honeywell (HON) trades at a 17x PE. 3M (MMM) is at an 18x PE ratio. GE doesn’t have a comparable trailing PE ratio, due to all the acquisitions and divestitures over the past year. However, based on full year 2016 earnings estimates, GE is around a 19 PE for 2016, putting it at a premium to the peer group.

On an EV/EBITDA basis, which takes total debtload into account, GE comes in at a 19.6x ratio, well above Honeywell at 10 and 3M at 11. Given that 10 is often viewed as a generally fair valuation level for an average company, GE stock currently sports a slightly aggressive valuation on this metric as well.

Verdict

GE stock will have better days as the turnaround continues to gain steam. But 2016 isn’t the year for shares to go much higher. Lack of dividend growth and economic headwinds are likely to outweigh upside from Iran in the near term.

At the time of this writing, Ian Bezek had no position in any of the stocks mentioned. You can follow him on Twitter at @irbezek.

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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/general-electric-ge-stock-pros-cons-2/.

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