General Electric Company (GE) Stock Is Running Out of Gas

Advertisement

In the month since General Electric Company’s (NYSE:GE) oil and gas division bought out oilfield services giant Baker Hughes Incorporated (NYSE:BHI), GE stock has risen more than 11%. Now it seems to be losing, um … gas.

General Electric Company (GE) Stock Is Running Out of Gas

And that begs the question: Has the recent runup in General Electric been merely a product of merger momentum, or could the diversified company’s larger energy footprint help rejuvenate the stock in the years to come?

What Baker Hughes Means for GE

First, let’s start with what exactly Baker Hughes gives GE. It specializes in products and services for hydraulic fracturing (a.k.a. “fracking”) and horizontal drilling for extracting oil and natural gas from shale rock. Before now, GE’s Oil & Gas division has specialized primarily in making oil drilling equipment. The combination of the two will allow GE to supply its own equipment to drill for oil and gas in places like the Bakken, and produce it.

The companies estimate that their new oil and gas partnership will add 4 cents per share to GE stock’s bottom line by 2018 (the deal won’t become final until mid-2017), and 8 cents by 2020. For perspective, that’s 2.7% and 5.4%, respectively, of this year’s earnings-per-share estimates.

That’s not small potatoes, but it’s not a complete game-changer for a company that also has its hand in electricity, aviation, healthcare, transportation and life sciences. Now, if oil prices break free of their $40-to-$50 malaise now that OPEC is limiting production for the first time in two years, then the above estimates might be conservative and the Baker Hughes deal might be more of a difference maker.

It should be noted that Baker Hughes isn’t the first acquisition for GE’s Oil & Gas division in recent memory. Since 2007, General Electric has shelled out more than $14 billion in buyouts trying to build up its oil and gas division. During that time, GE stock has declined. The bursting of the dot-com bubble shortly after the turn of the century knocked General Electric back from $57 to $24, the 2008-09 recession sent it spiraling down to $10, and the stock hasn’t climbed much higher than $32 since.

GE stock doesn’t carry the same weight on Wall Street that it once did. That said, it has been trending in the right direction during the last couple years (up 20% from the start of last year, nearly triple the 7% return in the Dow Jones Industrial Average) as the company has returned to sales growth. Earnings growth has been less consistent, and the Baker Hughes deal should help in that regard.

I doubt GE can sustain its current post-merger levels for much longer. The Baker Hughes addition is certainly a positive, but the payoff is both too modest and too far down the road to propel GE stock back to pre-recession levels overnight.

In fact, the stock has already settled into a tight $30-to-$31 trading range for the better part of three weeks following the big November run-up. Another break higher could be forthcoming, but it won’t be an 11%-in-two-weeks kind of breakout.

GE Stock Momentum Already Slowing

General Electric is no longer a growth stock. It is a solid dividend payer, having upped its payout each of the past six years and with a current yield just below 3% (though its 100% payout ratio is a bit of a concern). And at 18 times forward earnings estimates, GE stock trades at a fairly reasonable value.

If you’re an income investor looking for a steady dividend grower with a decent yield, General Electric is a good buy. But if you’re looking for further short-term growth after a big merger, there are better places to invest your money than GE stock.

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

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/general-electric-company-ge-stock-running-out/.

©2024 InvestorPlace Media, LLC