General Electric (NYSE:GE) has been on a tear ever since it announced its first-quarter earnings in April. At Monday’s closing price of $23.77, the stock price is up around 10 percent since the earnings announcement.
This rapid growth is unusual for GE, which is often thought of as stock that exhibits stable growth and attractive dividends. It is safe to say that shareholders are not complaining about GE’s recent success. With that being said, let’s use our CHEAT SHEET framework to decide whether GE can keep its positive momentum and if it is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
Catalysts For Growth
General Electric is a multinational conglomerate operating in four different industries: energy, technology, capital finance, and consumer and industrial products. GE is such a large and diversified company that it can almost be viewed as a proxy for the overall economy; thus, when the economy performs well, so does GE, and vice versa.
GE has benefited recently from higher consumer and industrial expenditures as the economy continues to rebound and the Fed continues its stimulus program. GE, the largest manufacturer of jet engines, saw a sharp increase in engine orders from both Boeing (NYSE:BA) and Airbus. GE should expect those orders to continue as both airplane manufacturers race for dominance in the widebody jet market. Moreover, GE Aviation has recently begun building a new factory in Asheville, North Carolina. The factory will manufacture ceramic matrix composites, a new technology that will improve fuel efficiency in its new LEAP jet engines and reduce greenhouse gas emissions. GE anticipates delivery of these LEAP engines to Boeing and Airbus in 2016.
GE’s capital financing arm currently generates 40 percent of the company’s profits. Despite how lucrative the division is, management at GE is focusing on downsizing GE Capital. The decision to shrink such a profitable division may leave investors scratching their heads, but GE Capital created many of the company’s financial woes during the 2008 financial crisis and still leaves GE exposed to risks associated with the financial services sector.
Let’s use some fundamental analysis to help determine whether GE is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
Fundamentals Are Strong
GE confirmed the strength of its financials after announcing its first quarter earnings on April 19. It reported first quarter operating earnings of $4.1 billion, up 14 percent from last year’s earnings. The company increased its cash pile by $12.2 billion to $136.1 billion while simultaneously decreasing its borrowings from $414.1 billion to $397.3 billion. Moreover, GE has recently undertaken a company-wide cost-cutting initiative to the tune of $1 billion, which will boost operating margins.
Investors should be careful when utilizing relative valuation methods to analyze GE because the company has four vastly different business operations. Two often-used comparables are Citigroup (NYSE:C), a competitor for GE’s capital financing division, and Siemens (NYSE:SI), a competitor for GE’s electronics division.
GE currently trades at a more attractive PE ratio than Citigroup (17.59 vs. 18.12). This means that GE’s earnings to date are relatively cheaper than Citigroup’s, implying that GE is a better value. Moreover, GE has a higher dividend yield than Citigroup (3.2 percent vs. 0.1 percent). Citigroup has a growth rate that is twice that of GE’s, but if you take into account the extra risk that a pure financial services firm like Citigroup is exposed to, GE is clearly the more attractive of the two.
Siemens has a lower P/E ratio than GE suggesting that it is relatively cheaper (17.59 vs. 16.24); however, its dividend yield is lower than GE’s. Additionally, analysts project that Siemens will have a negative growth of -6.5 percent over the next year. A negative growth rate is never a good thing for shareholders.
Technicals Are Strong
At Monday’s close of $23.77, GE is currently trading above both its 50-day moving average of $23.16 and its 200-day moving average of $22.53. GE has been on a tear since its first quarter earnings announcement and is experiencing a strong uptrend. GE’s recent break through its 50-day moving average suggests positive momentum and investor sentiment moving forward. GE is quickly approaching its 52-week high of $24.13.
Investors who have a bullish outlook on the economy should consider adding GE to their portfolio. The company is so large and diverse that investors can almost look at it as a fund indexed to the S&P 500. A history of strong management and attractive dividend yields relative to its competitors make this a good long-term stock to have in your portfolio.
Those bearish about the near future of the economy would do best to avoid GE. If the economy becomes stagnant, GE is likely to take a hit. A large part of its business operation is consumer and industrial products. If we fall into another recession, these divisions will take large hits. Worse off will be GE Capital, a large source of GE’s profits. Another recession would cripple GE’s capital financing division — one of the reasons that GE managers are working to downsize this division.
For now, investors would do best wait and see if and when Ben Bernanke and the Fed decide to unwind the stimulus program. GE announces its second-quarter earnings on July 19. Investors should see how GE performs in the current quarter, specifically with respect to the success of their cost-cutting initiative. If this cost-cutting program is successful, it will provide a nice buffer against losses in revenue should the economy suffer another decline in the near future. For now, General Electric is a WAIT AND SEE.
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