Restructuring Presents An Opportunity For General Electric Stock Investors

  • General Electric is poised to grow significantly due to its restructuring plan.
  • GE's stock is not dirt cheap, but it is not very expensive either, and its average annual estimated EPS growth is high.
  • I believe that the ShipXpress acquisition will increase GE Transportation revenues and profits.

As previously announced, General Electric (NYSE:GE) has decided to restructure the company focusing on its industrial group and divesting most of GE Capital, retaining only the portions of the business that remain relevant to its Industrial segment. As I see it, GE's decision to restructure the company focusing on its industrial group is a smart move, making the company easier to manage, with focus on activities with higher growth prospects. As a part of this plan, the company has recently announced a new important acquisition and another significant business sale.

On August 30, GE Transportation announced the acquisition of ShipXpress, a top provider of cloud-based software solutions that enable transportation, industrial, and commodities businesses to efficiently operate with supply chain partners. GE Transportation, a division of General Electric, is the world’s leading producer of rail and transportation-related products and offerings.

In the press release, Jamie Miller, GE Transportation President and CEO, said:

“By combining ShipXpress’ innovative software products with GE’s sensing technology and industrial-strength platform Predix, we’ll deliver the industry’s most advanced, scalable cloud-based solution to accelerate the movement of goods and information, and enhance supply chain performance and customer service. Our combined capabilities will help short-line railroads better analyze their rail operations, car accounting and supply chain information, and deliver a data-rich path to ongoing performance improvement, asset and operations optimization.”

Although GE has not disclosed the amount involved in the deal, I believe that it is not paying too much and that the ShipXpress acquisition will increase GE Transportation revenues and profits. According to GE, the deal will expand its portfolio of solutions into the logistics value chain, increasing its offerings for shippers, and expanding its ability to deliver information and transaction services for railroad customers around the world.  Moreover, the company will gain nearly 200 industry, technical, and software development experts who have been providing their services to ShipXpress.

In an another development, on September 1, GE announced that it has completed the sale of its Commercial Lending and Leasing business in India to a consortium of former GE Capital executives. The transaction represents ending net investment of approximately $0.4 billion as of the end of the second quarter of 2016.

According to GE, since the April 2015 announcement of its transformation plan GE Capital has signed agreements for the sale of approximately US$192 billion of businesses and has closed about US$170 billion of those transactions. GE Capital expects to largely complete the process of selling nearly $200 billion of businesses by the end of 2016 and believes it is on track to deliver approximately US$35 billion of dividends to GE under this plan.

General Electric Growth Drivers

In my previous article about General Electric, I argued that GE's digital initiatives will be significant growth drivers for the company since connecting industrial machines to the internet through the cloud could simplify business processes.

General Electric can also achieve considerable growth from its diverse product lines and its massive presence in growing markets for power generation, aviation, and healthcare.

The company is also well positioned to achieve growth from its growing strong backlog. At the end of the second quarter of 2016, the company had a record backlog of $320 billion, up 17% from the same quarter a year ago.

2016-09-06 17_29_31-Photos 961               

Source: company presentations

General Electric Stock Performance

The GE stock has been a market performer in the last few years, however, in my opinion, the stock could outperform the market in the next few years. Year to date, the GE stock is up 0.4% while the S&P 500 index has increased 6.7%, and the NASDAQ Composite Index has gained 4.8%. Since the beginning of 2012, GE stock price has grown 74.7%. In this period, the S&P 500 Index has increased 73.3%, and the NASDAQ Composite Index has risen 101.5%.

Valuation

According to its valuation metrics, GE's stock is not dirt cheap, but it is not very expensive either, and its average annual estimated EPS growth for the next five years is high at 12.5%. The trailing P/E is 26.4, and the forward P/E is 18.2. The price to sales is at 2.30, and the price to book value is 3.30. Furthermore, the price to cash flow ratio is 18.9, the Enterprise Value/EBITDA ratio is 24.1, and the PEG ratio is 1.66.

Dividend and Share Repurchase

General Electric had cut its dividend payment in the years 2009, 2010, as a result of the 2008-2009 global financial crisis, but had started to increase its dividend payment again in 2011. GE said that it plans to maintain its dividend at the current level in 2016 and grow it after that. The present annual dividend yield is at 2.94%, and the payout ratio is at 85.8%. The annual rate of dividend growth over the past three years was high at 9.5%, and 14.9% over the past five years.

 2016-09-06 17_30_02-Photos 962

Source: company’s reports  *assuming same dividend rate for the year

GE's board has authorized a repurchase program of up to $50 billion in common stock. The company aims to return $32 billion to shareholders between 2016 and 2018 through stock buybacks and increasing dividend payments. GE expects to reduce its share count by 8.0-8.5 billion by 2018.

Conclusion

In my view, GE's decision to restructure the company focusing on its industrial group has been a smart move, making the company easier to manage, and focusing on activities with higher growth prospects. As I see it, General Electric is well positioned to obtain significant growth due to its digital initiatives. The company can also achieve considerable growth from its diverse product lines and its massive presence in growing markets for power generation, aviation, and healthcare, and from its growing strong backlog. Although GE has not disclosed the price of the ShipXpress acquisition, I believe that it is not paying too much and that the deal will increase GE Transportation revenues and profits.

GE's stock is not dirt cheap, but it is not very expensive either, and its average annual estimated EPS growth for the next five years is high. Moreover, GE generates strong cash flow and returns substantial capital to its shareholders by stock buyback and increasing dividend payments.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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