The market is increasingly worried about recession, but if you look at a global bellwether like General Electric Company (GE) there’s nothing to worry about. Just don’t take your cue from the performance of GE stock.
Naturally, GE is following the rest of the market down: Shares are off about 10% for the year-to-date, which essentially matches the performance of the S&P 500. It’s just too bad that the 2016 drawdown is obscuring some of the good things happening with General Electric.
Shares in the diversified industrial giant ended last year with an impressive rally based on the brisk efficiency with which the company disposed of its financial business.
Cut to today and asset sales are still moving apace. The market seems happy enough with the prices General Electric is getting. But the only thing investors seem to care about are global macroeconomic woes.
Make no mistake, GE stock is especially sensitive to the economic cycle. It makes big-ticket industrial products like turbines, engines for trains and MRI machines. These are the sorts of thing companies don’t buy when a recession is on or imminent. Cutting capital expenditures is Recession 101.
Making matters worse, General Electric has large exposure to the rout in energy prices. The company’s oil and gas business manufactures pricey kit for everything from drilling to refining. Needless to say, demand for such things doesn’t hold up real well in the midst of an oil glut.
And then, just to put a cherry on the top of all this pessimism, GE also has heavy exposure to China and other lackluster or recessionary emerging markets.
GE Stock – No Downturn Here
The funny thing is, when you consider General Electric’s results, outlook and what it’s seeing on the ground, there simply is no recession in the U.S. or abroad. As CEO Jeff Immelt told analysts recently:
“I have a difficult time reconciling [GE’s solid results] with the mood that is in the markets … I know there is a concern about emerging markets in total, but our organic growth was up 7% in the quarter.”
In the most recent quarter, even with GE oil and gas just hammering results, industrial order still managed to grow. The company’s biggest segment of power turbines and equipment saw order growth of 29%.
Looking to the future, order backlog rose 7% for industrial goods. And GE expects organic growth — which excludes the effects of acquisitions and divestitures — to increase 2% to 4% organic in 2016.
Boom times? No, but hardly recessionary.
As we noted a few weeks ago, the company’s fourth-quarter results confirms the long-term bull case on GE stock. Sure, the current year could be ugly, performance could deteriorate and better-than-expected revenue and profits could go ignored in an ensuing bear market.
The point is that current macro woes won’t last forever. It’s called a business cycle for a reason.
The early returns are encouraging. GE’s strategic course looks very wise. Eventually the market will have to recognize it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.