As was pretty much expected, General Electric Company (GE) issued a mixed quarterly earnings report because of continued weakness in oil and transportation, but there weren’t any red flags for holders of GE stock.
GE is making faster-than-expected progress in shedding its financial arm, but as wise as the move may be, it’s a tough time to become a pure-play industrial.
Ironically, the financial services the company expects to retain helped earnings beat Wall Street’s forecast.
The rout in oil prices, strengthening of the dollar and persistent economic weakness from Asia to South America have proven stiff headwinds for General Electric and GE stock.
For the most recent period, adjusted earnings came to 21 cents a share, easily surpassing analysts average estimate for 19 cents, according to a survey by Thomson Reuters. Revenues likewise topped the Street forecast, coming in at $27.85 billion vs. $27.62 billion.
Those are good-looking headline numbers, but it’s tough to get excited when it took GE’s rump financial segment to make its numbers. And organic revenue (an important indicator of health on the industrial side) was disappointing.
Organic revenue, which excludes foreign exchange and discontinued operations, dropped 1% in the first quarter. At the end of 2015, organic revenue growth was a bright spot for GE. But before anyone panics, GE reaffirmed its forecast for organic revenue to increase 2% to 4% this year thanks to strength in the second half, but expect this to continue dragging on shares.
The issue, of course, is weak demand from the oil and gas industry. Shipments of power generation equipment also disappointed in Q1, but GE expects a strong rebound later this year.
Bottom Line on GE Stock
The bottom line is that General Electric was able to maintain its full-year adjusted earnings forecast of $1.45 to $1.55 a share. That’s reassuring, but this outlook didn’t exactly give the market a thrill in the first place.
As we noted heading into earnings, General Electric earnings could really use a catalyst. They’re not going to get one from this report. Shares are down around 2% for the year-to-date and are reaching the top of what constitutes an attractive valuation.
This is, after all, an industrial conglomerate in a slow-growth world. On a relative basis, GE stock looks reasonably compelling. Shares are trading at more than 17 times forward earnings on a long-term growth forecast of 12.5% per annum. That’s a better value than the broader market, which goes for 18.5 times forward profits on a growth rate of a little more than 5% a year.
It’s also the case that GE stock isn’t exactly an outlier in the industrials sector. The broader group has a price-to-earnings multiple of 15.7, but industrial conglomerates cost almost 20 times forward earnings.
There’s still value to be had in GE stock, but it’s going to take some time to reveal itself. Sentiment these days is against anything tied to oil and gas (rightfully so), and GE’s transformation remains a work in progress.
That said, it still looks like a buy for patient investors willing to wait out a prolonged period of global sluggishness. However, excluding a buy-on-the-dip opportunity, the window on getting shares at an attractive valuation is getting pretty narrow.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.