General Electric Company (NYSE:GE) reports earnings Friday and given the way analysts have been lowering their forecasts heading into the release, the industrial conglomerate should beat the Street once again. However, that won’t be enough to serve as a catalyst for GE stock if a lot of the other pieces don’t fall into place as well.
Thanks to its transformation into a pure-play industrial, General Electric stock hasn’t been this appealing in years: It’s streamlined, nimble and much easier to understand and model.
That said, there are still many moving parts for GE stock here. If past is prologue, the power, healthcare and aviation divisions are going to have to do some heavy lifting.
At the same time, investors will be keying on its acquisition of Alstrom, which is essentially the General Electric of France.
But that’s not all. GE has pledged to become a top 10 software company in a matter of years and it has been on a buying binge to make it so. Related moves include significant investments in 3D manufacturing technologies.
Finally, the market is going to focus on margins, order backlog and, as always, guidance. Sluggish global growth and a strong dollar have hampered General Electric stock for some time now and it would be somewhat surprising if GE saw any let up ahead.
GE Stock Is Set for Top- and Bottom-Line Gains
For the most recent quarter, analysts on average expect GE earnings to come in at 32 cents a share, up from 29 cents in the same period a year ago, according to a poll by Thomson Reuters. The Street’s revenue forecast if for a 6.1% increase to $29.64 billion. For what it’s worth, General Electric earnings have topped analysts’ average estimate for five consecutive quarters. On the other hand, it has missed on the top line three times over the same span.
The takeaway is that GE is likely to deliver yet more incremental progress on a number of fronts in a tough macroeconomic environment. And investors will likely continue to view General Electric stock somewhat skeptically.
That’s probably fair enough. Even if the global economy were more favorable, investors would be cautious with GE’s historic return to its industrial roots. Taken together, General Electric stock is off 6.5% so far in 2016 and has been stuck in a narrow trading range for more than a year now.
Although Q3 earnings might not break the logjam anytime soon, GE stock still looks like a solid long-term investment. Consider that it has a forward price-to-earnings ratio of 17 and a long-term compound annual growth forecast of 12. That’s a fairly compelling valuation even if it doesn’t scream “bargain.” And keep in mind, analysts have tended to be too conservative in their forward estimates.
The dividend yield of 3.19% is also attractive in these income-constrained times.
General Electric is investing heavily for the future and it will take some time for all these various plans to bear fruit. The important part to remember is that by the time it’s clear that these strategies are working, much of the upside will already be reflected in the share price.
If you’re willing to be patient with this name, GE stock is a more than solid choice for an equity income portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
