Should You Buy General Electric Company (GE) Stock? 3 Pros, 3 Cons

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Despite better-than-expected earnings, General Electric Company (NYSE:GE) sold off following the quarterly report. GE stock is now trading back under $30. That level has capped appreciation in recent months, making this stock a good one for traders and covered call option sellers.

Should You Buy General Electric Company (GE) Stock? 3 Pros, 3 Cons

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Is this a good time to buy GE stock? The dividend looks safe, you can tune out the bears on that charge. However, the stock is unlikely to gain much traction until the company’s turnaround effort comes closer to completion.

Let’s dive into the details.

GE Stock Cons

Honeywell Reported Better Results: Shares of chief GE rival Honeywell International Inc. (NYSE:HON) are up more than 2% on Friday. HON stock is moving higher following a very solid earnings report.

Honeywell grew earnings by 11% on the quarter and put in stronger than expected margins. On top of that, the company raised full-year guidance for 2017 significantly. While GE didn’t report bad results, they lagged significantly behind Honeywell’s effort … particularly given that both companies reported on the same day, Honeywell took some real shine off GE’s results. Thus, it seems that GE stock is down a couple of percent, despite results that might justify the stock trading flat.

Oil & Gas Remain Weak: General Electric reported reasonably strong results. Its core industrial business delivered. And the renewable energy segment shined in particular, with revenues up 22% — though we should expect that area to lose traction with Donald Trump now running American energy policy.

However, the flip-side of renewables are the fossil fuels. There, GE continues to struggle. Revenues for its oil and gas business fell 9% on the quarter and profits declined 33%. The company reported a modest uptick in orders going forward. However, it will take stronger than $50-per-barrel oil to really get things moving there again. GE plans to combine its energy unit with Baker Hughes Incorporated (NYSE:BHI) and float the combined unit as a public company. This may relieve the drag on GE’s core business. Until that’s done, however, oil will continue to be a headwind for General Electric. The recent surge in alternative-energy-related earnings is also likely to fade.

Turnaround Not Going Fast Enough: Many investors own GE stock due to its promised turnaround. The company is shedding underperforming and low-margin assets, has ditched the finance arm and tried to build a stronger core unit out of what remains. There is serious logic for this reorganization. The old General Electric model had grown so sprawled out that management had trouble effectively controlling everything.

However, management needs to execute for the turnaround to work. Take cost savings. GE suggested that there would be $1 billion in annual cost savings going forward. That increased cost-cutting came as management responded to demands from activist investors such as Trian Fund Management. However, in the first quarter, the company only cut $76 million in costs. That’s far short of the pace necessary to save $1 billion over the course of the year. Activist investors do not appreciate management teams which claim to hear their demands and then don’t follow through.

GE Stock Pros

Potentially Cheap During Transition Period: GE stock has struggled during the transition. It has barely recovered its pre-financial crisis levels, and continues to deliver only modest gains lately. The company’s aggressive asset divestment program causes revenues and earnings to look mediocre. Free cash flow is a particular concern. The dividend might not be sustainable if free cash flow doesn’t improve.

However, this view might miss the bigger picture. GE has great core assets. They’ve consistently eliminated the lower-quality and lower-margin assets. What remains should deliver stronger results. And while the asset sales hurt results now, they did produce cash sufficient to buy back more than 10% of GE stock over the past two years. That will help earnings per share nicely once the turnaround is complete. General Electric better carry out the promised cost cuts however; with a shrinking business, cutting overhead is pivotal to success.

Trump Bonus: President Trump isn’t good for renewable energy, and will hurt General Electric in that area. Furthermore, Trump and GE CEO Jeffrey Immelt have disagreed on certain policies, such as the travel ban. Trump has also criticized General Electric regularly for outsourcing jobs.

On the whole, however, Trump will benefit GE stock. “Buy American” sentiment helps U.S.-based firms greatly. While Trump’s policy agenda has fluctuated following the healthcare bill defeat and foreign military strikes, infrastructure remains attractive. It has more bipartisan support than most other Trump or Republican-backed policy ideas. And General Electric is well-situated to deliver on infrastructure. Its product offerings run well beyond just oil, gas, and renewable energy. GE can also provide needed locomotives, water treatment systems and energy grid solutions, among other products needed for infrastructure building.

Reasonable Dividend Yield: GE stock currently yields 3.2%. That is a solid offer in today’s market. The S&P 500 offers a just under 2% yield by contrast. I have seen investors fretting that the dividend isn’t growing quickly enough. It’s true, General Electric has barely hiked the dividend in recent years as free cash flow generation has slipped.

Once the turnaround is complete, however, there should be plenty of free cash flow to get the faster dividend hikes going again. Investors can sleep well at night owning a greater-than-3% yield from one of America’s leading conglomerates. The company has issues, but the existential wipeout risk is gone. The elimination of the finance business has restored GE stock to blue chip status and made the yield credible again.

Verdict

You’ll get a solid dividend and probably modest stock price upside from GE stock here. If that meets your investment needs, this earnings-related dip might be worth buying. The quarter wasn’t bad, yet the stock has sold off. However, until the turnaround finishes, GE stock is unlikely to make big moves. You’re unlikely to see $40 per share until the cost-cutting is done and earnings and cash flow look better.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/buy-general-electric-company-ge-stock-pros-cons/.

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