General Electric Company (NYSE:GE) stock, which ranks as the worst performer in the Dow Jones Industrial Average — losing 22.6% for the year-to-date — has a tough hill to climb before earning back Wall Street’s trust. But GE stock, fresh on heels of losing billionaire investor Warren Buffett, can still surprise to the upside.
Poor market sentiment, uncertainty surrounding its core business and the extent to which the industrial conglomerate can extract value from its mega-deal with Houston-based Baker Hughes, a GE company Class A (NYSE:BHGE) has been the main issue pressuring General Electric stock, which fell last week to a new 52-week low trades at two-year lows of around $24.
And we haven’t even mentioned the leadership change as GE recently installed John Flannery as new CEO, replacing long-time chief Jeff Immelt, who has failed in his numerous attempts to create shareholder value.
Changing the GE Stock Narrative
In other words, many investors still doubt General Electric to the extent where even Buffett has ignored his own mantra of “selling high.”
Considering GE stock traded north of $30 four months ago, this might suggest Buffett either believes the stock is now fairly valued or lacks the confidence that General Electric — in its current construct — can get back to that level.
In either case, investors want to know to what extent GE stock can climb higher.
Is General Electric a High-Growth Company?
Obviously, oil prices and the lack of stability in that industry creates an overhang for General Electric and a headwind for GE stock. The company makes money to the extent that key global oil demand and volume are at strong levels. At the same time, it underscores how important it is for GE, which has begun to diversify the business into areas like renewable energy, to reduce its dependence on oil and gas.
In that vein, Flannery’s main task as CEO is to convince the market that the company remains on track to transition from a slow-moving industrial, manufacturing and energy company to an integrated business conglomerate that can deliver growth in multiple areas such as communication, technology, data analytics, among other competencies. And this is where GE’s flagship project Predix, a cloud-based platform for big data analytics, can be a powerful driver.
The Boston-based company calls Predix the foundation for all of its applications located on the Industrial internet. According to GE’s website, “Predix provides the technical foundation to power industrial apps that drive outcomes ranging from the reductions of unplanned downtime to improved asset output and operational efficiency.”
Essentially, by shifting its business to capitalize on industrial digitization, General Electric’s cloud-based data analytics ecosystem, which remains undervalued by Wall Street metrics, could become the key to its growth in the years ahead. GE has already generated north of $6 billion in digital revenue. And the company believes cloud-based revenue can grow to $14 billion, or 133% higher by 2020.
This growth rate, if achieved, would dwarf those of existing traditional cloud players like Salesforce.com, Inc. (NYSE:CRM), Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN).
What to Like About GE
While General Electric stock has hit a major wall, pressured by a combination of factors, including global worries about lower oil and gas prices, dividend investors with a long-term outlook, should capitalize on this opportunity to lower their costs basis, while collecting General Electric’s generous 3.95% annual yield, which — amid the current low-interest rate environment — is an attractive quality.
The cheap stock price and the low expectations from the market are two more things long investors should like. Looking ahead, GE will report third-quarter fiscal 2017 earnings results on Oct. 20. Wall Street expects earnings of 51-cents-per-share on revenue of $32.67 billion. This compares to the year-ago quarter when the company earned 32 cents per share on $29.27 billion in revenue.
These measures, if achieved, would translate to year-over-year growth of 59% and 11.6%, respectively. On their own, those numbers would be solid. But comparatively, they also underscore the degree to which General Electric struggled last year and is emerging from a tough trough. That said, investors should nonetheless applaud the company’s transition and apply more patience given that full-year earnings-per-share are expected to grow at 5.6% this year and more than 8% next year.
Bottom Line for GE Stock
If you’ve held GE stock over the past year, you’re down about 21.5%, while the S&P 500 Index is up more than 12%. The company’s digital push has the potential to reverse the decline in GE stock. But it’s not going to happen overnight. The good news is, Flannery has a strong track record of turning around businesses. Given General Electric’s research and development capabilities and its advances with analytics such as its Predix software, there is now plenty of value-creating options, especially with Baker Hughes now in hand.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
