General Electric Is Priced for Perfection

General Electric Company (NYSE: GE)
Industrial Goods; Diversified Machinery; HOLD

GE is exposed to the growth of infrastructure development. Its strategic shift can be beneficial for investors in many ways that includes margin improvements, higher growth, dividends and buybacks. Technology lead will keep GE ahead of the pack in infrastructure development. Emerging technologies can give a substantial boost to the stock price if one of these ventures gains massive adoption. Oil prices may weigh on earnings but GE’s scale and diversity allows it to reposition accordingly. Oil and Gas may come under pressure but, simultaneously, Aviation can get a boost as airline profits allow for more CAPEX under low oil-price environment. From a valuation perspective, there seems to be no capital appreciation left in the stock. Nonetheless, it supports a 3% dividend yield. We think that current investors should hold on to GE but the stock doesn’t offer much value for prospective investors under the current scenario.

General Electric is a very large infrastructure company exposed to infrastructure spending, which is expected to reach $60 trillion by 2030. GE is a highly diversified entity entailing low risk. Revenue is distributed among industries, which shields the company from an industry specific decline. Currently, General Electric is executing a strategic shift as it is planning to sell most of its financial services business. The company expects to generate 90% of its earnings from industrial segments by 2018; it intends to keep the industry specific financial services business though. This transition brings several benefits for GE. Industrial segments are a high margin business; an exit from financial services will lead to overall margin improvement. Growth of industrial segments is also higher; 7% year-over-year growth was recorded in 2014. On the other hand, GE Capital revenues declined during the same period. Exit from the financial services will allow the company to concentrate on its industrial segments resulting in productivity and efficiency gains. Further, the transition allows GE to get rid of stringent financial regulation, which will add to cost savings. GE Capital is well received by the market and the company has multiple bidders for its different financial segments. Swift completion of these deals and transactions will accelerate buybacks and dividend hikes, which will be catalytic for stock price growth.

On the flip side, declining oil prices will eventually weigh on GE’s performance as the company generates around $18 billion from its Oil & Gas operations. The decline is impacting CAPEX budgets of oil and gas companies. It would be difficult for GE to sustain its topline growth in declining oil-price environment. The Iran deal adds more concern to the pricing of oil. Looking short-term, 10% growth in the oil and gas segment during 2014 is a difficult comparison going forward, and this will continue to shadow good news in upcoming quarters.

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