Does General Electric Company Stock Offer Opportunity In the Rubble?

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At this point, investing in General Electric Company (NYSE:GE) feels like catching a falling knife. GE stock has lost almost 16% this month.

What happened? GE on Oct. 20 reported its first profit miss in two-and-a-half years. It cut its full-year earnings guide and indicated that a dividend cut may be coming soon. GE stock proceeded to fall 13% over the following week. That was the stock’s worst five-day period since March 2009, when the S&P 500 was touching Great Recession lows. 

Does General Electric Company Stock Offer Opportunity In the Rubble?
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It is moments like these when Warren Buffet’s wisdom shines brightest. Be fearful when others are greedy and greedy when others are fearful.

GE stock isn’t going anywhere anytime soon. This is a company that has been around for 125 years and played a critical role in shaping the modern world. The company has hit some tough times recently due to weakness in its Power and Oil and Gas businesses, but management is appropriately diversifying where they need to, cutting fat where they need to, and investing where they need to.

A turnaround isn’t a matter of “if”. Its a matter of “when”.

I think “when” to buy GE stock is now or at least very soon. Right now, everyone is worried about the 4.7%-yielding dividend getting cut at the November investor meeting. That will likely happen. But GE stock has sold off in a manner that indicates that the stock price is now baked with expectations for a cut. Risks related to a dividend reduction seem mitigated, while rewards related to no cut seem high.

The dividend issue seems to be a microcosm for the whole GE issue. There is a lot negativity priced into this name right now, so much so that the risk-reward profile on GE stock is starting to skew considerably towards the upside.

GE’s Turnaround is Believable

General Electric’s Power and Oil and Gas businesses are getting killed. Revenue is falling and profits are falling even more. General Electric has long been known as a power and oil and gas company. So when those three business segments fail, GE stock does not work.

But even with those businesses struggling mightily, GE still only saw organic revenue decline 1% last quarter. Operating profit slipped 7%, and earnings were off by 9%. If that’s as bad as it gets for General Electric, then the company must be doing a bunch of other things right.

Indeed, General Electric is executing on other fronts. Excluding power and oil and gas, organic revenues rose 2%. Aviation and Healthcare posted strong quarterly profit gains. In fact, all segments excluding power and oil and gas expanded profit margins last quarter.

Meanwhile, GE is flirting with potentially super-charged growth in the Internet of Things (IoT) segment. For each big industrial device  General Electric sells, the company can add a little sensor to it. That essentially makes the industrial equipment smart. This smart equipment harvests loads of data and sends it to GE, where its analyzed and then presented to the buyer in a logical, actionable manner.

 

Overall, the GE growth story isn’t that bad. And the parts of GE that are bad will be cut out over the next 24 months. Management plans to divest $20 billion worth of assets in that time frame. That fat-cutting will come primarily from management’s focus on streamlining business operations and simplifying the product portfolio.

Meanwhile, GE is also doing some housecleaning at the executive level and expects to pull about $2 billion in costs out of the operating model by 2018.

It’s clear to see that some big changes are coming to GE. Right now, profits are getting killed. But in two years, profits should be a lot higher thanks to a bunch of cost-cutting, streamlined investments, and a simplified operating model.

Bottom Line on GE Stock

GE stock trades at 17.4x this year’s earnings estimate. Due to cost-cutting, earnings should be able to grow healthily from that depressed earnings base.

The Street is expecting around 11% annualized growth from fiscal 2017 to fiscal 2019. That is about the same growth expected from the S&P 500 Index. But the S&P 500 is trading at 19.6x 2017 earnings, a 13% premium to GE stock.

A market-average 19.6x multiple on $1.15 earnings estimates implies a year-end price target of about $22.50.

I think that is where GE stock will trend towards over the next several months, and then higher thereafter. With so much negativity already priced in, now feels like a bottom in GE stock.

As of this writing, Luke Lango was long GE.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/does-general-electric-company-stock-offer-opportunity-in-the-rubble/.

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