- The return to its industrial roots will increase service income and cash flows for GE, which is a good news for investors.
- GE has strong competitive advantages such as the huge amount of installed equipment and cost advantages. This protects investors against any downside risk.
- The stock market is in danger of breaking its September lows. If it does, one should be able to pick up GE stock at least 10% cheaper.
I wrote an article last month on General Electric Co. (NYSE:GE) stating that with the stock below $30 a share, now was not the time to buy it. This is a stock I watch very closely predominantly because of its strong competitive advantages and attractive dividend. General Electric stock is currently trading at just over $29 a share. If we break $29, the stock has a really strong support at the $28 level followed by the $26 level. Even though General Electric is definitely trading at short-term oversold levels, I still believe investors are going to get a better entry in the weeks and months to come. In fact, I'm hoping the stock will make it all the way down to the $26 level and at that point I definitely would be a buyer. Therefore, let's go through why I see short-term weakness, why I would still be a buyer and why recent developments improve the long-term fundamentals of this company.
Service Revenues Will Continue To Increase Which Will Stabilize Cash-Flows
First of all, we have to discuss this company's strong competitive advantages which are numerous compared to other companies working across these sectors. Strong competitive advantages definitely protect the downside in stocks and General Electric is no exception. Suffice to say, the lower this stock goes the more appealing it becomes. Firstly, even with the company currently operating in a really difficult Industrial environment, one cannot forget the huge amount of industrial equipment this company has already installed all over the world. These assets mean that General Electric every year collects more in service revenue than sales revenue. What does service revenue mean for the General Electric investor ? Well, the higher the service revenue goes, the more predictable and passive General Electric earnings become. Remember, many times in divisions such as power and aviation, service contracts can be taken out by clients for up to 20 years. Therefore, investors shouldn't underestimate the distinct advantages General Electric is going to avail of by returning to its industrial roots not just from the service revenue side but also from a higher margin perspective.
Due To Its Sheer Scale GE Has A Cost Advantage Over Its Competitors
Secondly, I believe the downside is protected in GE stock, to a large degree, because of its cost advantage over competitors. GE's strong competitiveness, in my opinion, stems from its huge research and development budget and its integrated business model. Spreading R&D budgets across multiple sectors of the business definitely results in synergies and cost savings for the company. Huge amounts of corresponding parts can be used across the company's eight divisions. On the industrial side of things, this has always been the company's goal from day one. Streamline processes to ensure that as many products as possible can be sourced from within and then used across as many divisions as possible. Furthermore, with the recent spinning off of the company's financial arm, GE is now in a much better position which invariably will mean even more capital going into annual research and development.
Combination Of A Falling Share Price With An Expected Dividend Hike Will Attract Investors
If GE stock managed to fall all the way back to $26 a share, the dividend yield would spike to over 3.5%. Existing GE shareholders have been very vocal in their efforts to get the dividend raised as quickly as possible. Shareholders know all too well the quarterly dividend payout of $0.23 still hasn't reached the 2009 quarterly payout of $0.31. Management has stated that the dividend would not be raised this year but should be raised at the start of 2017. I have no doubt that robust dividend increases will come. In the company's latest quarter, its debt to equity ratio dropped to 0.80 which is the lowest it has been for well over a decade. Therefore, when you combine a falling share price with dividend hikes in the pipeline, value investors will flock to this stock if it gets really oversold.
The market dropped over 26 handles on Tuesday (the 11th of October). This means that we could break the September lows of 2,125 which would be an indication that an intermediate decline could be underway. This could send GE stock all the way back to the $26 level.
GE Is Making The Right Moves With Its Acquisitions
On the acquisition front, I like the moves GE has been making in certain areas. The recent buyout of Arcam & SLM Solutions is a long term play in the industrial 3D printing space. This sector is growing strongly but it will take a while before earnings are positively affected. The Alstom deal last year was more than a $10 billion move. We haven't seen any meaningful synergies yet but recent developments such as the Hinkley Point order and the "Doosan" acquisition are steps in the right direction. The Doosan purchase, for example, will strengthen the service side of Alstom's HRSG business which should make Alstom's product line even more attractive to clients.
To sum up, General Electric still has strong competitive advantages that have only been enhanced, in my opinion, by its decision to ditch the financial wing. Its strong balance sheet (which can be leveraged for new acquisitions and to reward shareholders) and integrated business model will ensure it remains ahead of the competition in the industrial sector. I would caution investors to wait though as a better entry into GE stock may be just around the corner.