Shares in General Electric Company (NYSE:GE) are having a sleepy year so far, but don’t be lulled into thinking GE stock lacks the potential for serious upside for patient investors.
Freed from its designation as a systemically important financial institution, with GE Capital asset sales approaching $200 billion, the company is all but done turning itself into a pure-play industrial stock.
GE is now much easier to understand and slot into a portfolio. It also frees up General Electric to focus on more promising avenues of growth, such as the Internet of Things.
The company is committed to becoming a top-10 global software company by 2020. Analysts note that practically all multinational industrial companies are investing in this area, but GE has a head start on what’s been called a sector-wide gold rush.
It’s easy to overlook this green field as General Electric struggles with low energy prices, sluggish global growth, a strong dollar and the potential implications of Brexit, but IoT and software stands to be a powerful driver of future growth. As analysts at RBC Capital write:
“Digital revenues are expected to total +$6 bil in 2016, up +30% Y/Y and representing 5% of the total mix, with orders on pace to exceed +$7 bil. Longer-term, management aims to expand Digital revenues to ~$15 bil by 2020, implying a ~25% CAGR.”
GE Is More Resilient than the Market Knows
That’s not to say that General Electric or GE stock has nothing else going for it in the shorter term. For one thing, business could hold up much better than the market gives General Electric credit for. From Citigroup analyst:
“[C]ertain markets including consumer-based, construction (including infrastructure), aerospace, and even power could remain resilient in the current environment (especially if the U.S. Fed remains dovish, keeping interest rates lower for longer), and we still see the potential for some improvement in other core industrial markets as the overhang from very low oil prices recede.”
That last part about oil prices really sums it up for long-term investors. Energy prices are cyclical, as is economic growth, both here and abroad. No one knows when the cycle will turn, only that it’s inevitable. And because stocks are forward looking, a big chunk of the cyclical upside in General Electric stock will have already come and gone by the time it’s clear that the cycle has truly changed.
Click to Enlarge True, GE stock is essentially unchanged on a price basis so far this year, but to those who say GE stock never goes up, note that shares have gained 20% over the last 52 weeks. The valuation remains reasonable and the technical picture is favorable, with a price floor at the 200-day moving average.
GE is never going to be a sexy play, at least not like it was earlier in the century, thanks to the profit machine that was GE Capital.
But as a pure-play industrial on the cusp of a digital revolution, it does have the ingredients to become a better-than-average total-return vehicle.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
