Shares of General Electric Company (NYSE:GE) rose more than 2% in Monday’s shortened trading session after the industrial conglomerate announced that its closed its mega-deal with Houston-based Baker Hughes Inc. (NYSE:BHI). Investors want to know to what extent this event can send GE stock higher.
GE stock closed Monday at $27.45 and is down 13.13% year to date, versus a 8% rise in the S&P 500 Index and ranking as the second worst-performing stock on the Dow Jones Industrial Average.
Only Verizon Communications Inc. (NYSE:VZ), which has lost 15.7% in the first half of 2017, has performed worse. Meanwhile, if you’ve held GE stock over the pat year, you’re down about 13% while the S&P 500 is up more than 15%. So why would anyone bet on GE stock?
Reasons to Bet on GE Stock
With Baker Hughes’ assets now in hand, combined with GE’s own oil and gas equipment and services operations business, General Electric is now the world’s second-largest oilfield service provider by annual revenue of roughly $23 billion, surpassing Halliburton Company (NYSE:HAL) and is now looking up only Schlumberger Limited. (NYSE:SLB).
The combined entity, which will specialize not only in drilling and chemicals, but also offer oilfield equipment including blowout preventers (BOPs) and pumps to oil producers in 120 countries.
The new company will be called Baker Hughes, a GE Company, of which GE will own 62.5%, which will then be spun off as a separate publicly traded company that begins trading on Wednesday on the New York Stock Exchange under the stock ticker BHGE.
I see this as a solid move for GE, which has seen its oil and gas division hit hard from low energy prices. Spinning off the business gives General Electric — the parent company — much-needed shelter from oil’s boom or bust cycles. Not to mention allowing GE to steer its focus on North American activities, where Baker Hughes has established a strong presence.
While oil prices remain below the $60 level, where both companies anticipated oil prices would be by 2019, the leaders of the new entity aren’t discouraged, though they admit the uncertainty present some challenges.
“The crystal ball for all of us is cloudy,” said Lorenzo Simonelli, president and CEO of GE Oil & Gas. “But we know energy requirements are still going to increase, globally. The fundamentals are there for energy.”
This merger coincides with the recent recovery in oil prices, which until Monday, had risen for eight consecutive sessions. It is now the job of John Flannery, formerly President of GE Healthcare who last month succeeded longtime CEO Jeff Immelt, to execute in manner that takes of advantage of the many benefits this deal brings.
Flannery has a strong track record of turning around businesses. Given GE’s research and development capabilities and its advances with analytics such as its Predix software, there is now plenty of value-creating options with Baker Hughes.
Resetting GE’s Expectations
Looking ahead, the company is expected to earn 25 cents per share on revenue of $29 billion when it reports second-quarter results on July 21. For the full year, analyst expect $1.64 per share on revenue of the $126.04 billion.
After missing cash flow projections in the first quarter by a whopping $1 billion — albeit under Immelt — GE can’t risk starting Flannery’s tenure by missing on any metrics and losing Wall Street’s trust.
As such, Flannery’s first step upon this deal’s closing should be to reset GE’s core business and issue what he perceive to be realistic expectations for the company. So I wouldn’t be surprised if GE were to pre-announce or partial announce Q2 results within the next few days.
Bottom Line for GE Stock
The company’s leadership change, however, along with the value-creating closing of Baker Hughes makes GE stock a solid bet for the next 12 to 18 months, especially when combined with its strong dividend yield of 3.55%, versus the S&P 500’s 2% yield.
What’s more, if Flannery can make the necessary cost reductions that Immelt was seemingly incapable of making, GE stock — trading below its 52-week high of $33 per share — could prove to be a solid bounce-back candidate for the next 12 to 18 months, potentially reaching $35 to $40 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.