General Electric Company (GE) Stock Still Has What It Takes to Survive

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Could now be the time to bet on General Electric Company (NYSE:GE) and a potential revival in GE stock? The Dow Jones Industrial Average component is set to report second-quarter fiscal 2017 earnings results before Friday’s opening bell, marking Jeff Immelt’s last quarterly report as CEO.

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Depending on who you ask, Immelt’s string of failed decisions have been a cause of General Electric’s struggles or the outgoing leader was the victim of bad timing, particularly the great recession of 2008, which arrived on the heels of GE entering the financial sector.

GE stock — the second-worst performer on the Dow so far in 2017 — has fallen almost 40% since Immelt first became CEO on September 11, 2001, while the Dow has surged 125%.

Investors have grown even more frustrated by watching peers such as Honeywell International Inc. (NYSE:HON), 3M Co (NYSE:MMM) and United Technologies Corporation (NYSE:UTX) soar to new highs during that span. The latter two companies have posted double-digit returns year-to-date.

Nevertheless, GE stock still offers an attractive entry point for investors who value a strong dividend yield (3.58%), versus the S&P 500’s 2% yield. And regardless of where you stand, Immelt can close the chapter on his GE legacy on a high note by delivering a top and bottom-line beat Friday.

GE Stock: Expectations for the Quarter

For the three months that ended June, Wall Street expects the Boston-based company to report 25 cents per share on revenue of the $29.02 billion, translating to year-over-year declines of 51% and 13.4%, respectively. For the full year, ending in December, earnings of $1.62 per share would rise from $1.49 a year ago, while revenue of $125.31 billion would rise 1.3% year-over-year.

Beyond, the projected year-over-year declines for the top and bottom lines, investors will focus on GE’s cash flow results and cash flow forecast. The stock sold off last quarter after the company missed its own cash flow projections by a whopping $1 billion and reporting negative cash flow from operating activities of $1.6 billion and forecasting cash flow to be negative $600 million for the current quarter.

At that point, it didn’t matter that, on an adjusted basis, GE’s earnings of 21 cents per share beat analysts’ estimates by 4 cents. Likewise, on Friday, Wall Street will focus on the extent to which GE can continue to improve its Aviation segment — the second-largest unit — which posted a modest jump in first-quarter revenue. Elsewhere, the market will look for signs that, under incoming CEO John Flannery, GE can turn things around.

Looking Ahead for General Electric

Flannery, formerly President of GE Healthcare, has a strong track record of fixing broken businesses. And this leadership change, along with the value-creating closing of its mega-deal with Houston-based Baker Hughes Inc. (NYSE:BHI), could prove to be the catalysts GE stock needs to earn back Wall Street’s trust. There’s still a huge disconnect between what General Electric is able to do and what the Street is looking for. As such, Flannery will need to reset the business for growth and guide for clearer expectations.

The good news is, he will be given time to execute the Baker Hughes deal, which will combine Baker Hughes with GE Oil & Gas. The combined entity, called Baker Hughes, a GE Company, will help GE stock better compete with the larger players Schlumberger Limited. (NYSE:SLB) and Halliburton Company (NYSE:HAL). And there’s no question that this is a good move for GE, which has seen its oil and gas division hit hard from low energy prices.

Bottom Line

To the extent Flannery can make the necessary cost reductions that Immelt was seemingly incapable of making, GE stock could command the same level of respect as Boeing Co (NYSE:BA). At the same time, Flannery can receive some relief from activist investor Nelson Peltz and his Trian Fund Management, who are pushing for significant changes at the board level.

GE stock, which is currently priced at just 14.8 times fiscal 2018 estimates of $1.81 per share, looks like a solid bargain.

Assuming General Electric, say, achieves $2 per share in 2018 through cost cuts, this puts the forward price-to-earnings ratio at 13, or five points below the S&P 500 Index. And when applying a reasonable multiple of 17 to those estimates, the stock’s fair value points closer to $32 or 20% higher than current levels.

As such, GE stock presents solid value for investors who are looking for strong dividend payer that can outperform the market in the next 12 to 18 months.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/general-electric-company-ge-stock-survive/.

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