- GE stock has outperformed the market since the election result.
- The recent rally has stretched GE's valuation. The stock is currently in the overbought territory.
- GE stock remains a long-term buy, though it may face short-term correction.
The surprise election of Donald Trump has fueled a bull rally in the equity market with most major indices reaching all-time highs. The Dow Jones Industrial Average (INDX:INDU) is up more than 4.5%, while the Dow Jones Composite (INDX:COMP) and S&P 500 (INDX:SPAL) have gained more than 3%. The bull run is powered by the hope that the President-Elect's policies will spur growth and generate employment. General Electric (NYSE:GE) has been one of the major beneficiaries of this bull run with the stock gaining more than 6% since the election. GE's long-term fundamentals remain strong, but the recent rally has stretched its valuation. So, the major question facing investors is should they buy GE stock now or wait for a correction?
Does The Trump Victory Justify The Rally In GE Stock?
It is interesting to note that, before the election, the market was wary of a Trump Presidency, with the market showing a high level of volatility whenever Mr. Trump gained in the opinion polls. The rationale for this pessimism was that a Trump presidency would bring a high level of uncertainty in the market. However, after the election, the narrative has turned upside down. Instead of correcting, the market rallied on the hope that Mr. Trump's economic and tax policies will lead to a higher growth and employment.
Mr. Trump has vowed to spend hundreds of billions of dollars on building infrastructure. This proposal will boost GE's transportation and infrastructure business. Mr. Trump's proposal to remove restrictions on oil and gas sector will boost growth in this sector and benefit GE. GE has been making heavy investments in this sector, including the recent collaboration with Baker Huges. The recent deal will create the largest oil fields services company in the world. Mr. Trump's proposal to reduce the corporate tax rate and his proposal for tax cash repatriation by US multinationals at a significantly lower rate will also immensely benefit global giants like GE. (Also Read: Does The Baker Hughes Deal Make GE Stock A Buy?)
But on the flip side, Mr. Trump's protectionist policies to limit global trade will severely harm a global company like GE. Also, Mr. Trump's proposal to invest billions of dollars into infrastructure may not find favor with a fiscally conservative Republican-controlled Congress. In a recent interview, the President-Elect has said that he will have an open mind about the Paris agreement (he had earlier promised to scrap the agreement) and also "acknowledged" that there might be some link between human activity and global warming. If Mr. Trump decides not to scrap the Paris agreement then he will have limited room to spur growth in the oil sector. On the whole, the policy uncertainties still remain, though they have taken a backseat for the moment, but will likely show up again. Also, the uncertainties surrounding oil prices and global growth continue to remain. So the election result alone can't justify the recent rally in GE's stock price. Investors can expect some likely correction in the short run.
The Long Run Fundamentals Remain Strong
In the recent earnings call, the management reduced its 2016 organic growth and EPS expectations but kept the long-term targets intact, indicating that GE continues to remain a long-term growth story. The long-term growth will be powered by Alstom and GE's transformation into a digital industrial company. The Alstom acquisition has already started showing results. According to GE, the synergy gains from Alstom have amounted to $850 million YTD and the company expects these benefits to increase going forward. Management expects Alstom to contribute $0.15-$0.20 per share to 2018 earnings. In the third quarter, Alstom contributed $0.01 to the EPS. In the earnings call, GE reported that it continues to see strong order growth in the Alstom business.
Another growth area for GE will be its digital business and "Internet of Things". GE has been making a strong push in this area and expects its digital arm to generate $15 billion in revenues by 2020, three times the 2015 revenues. It has signed multiple agreements including with BP Plc (NYSE:BP) and SAP (NYSE:SAP). Based on these growth drivers, analysts expect GE to grow at a 12.5% CAGR for the next five years compared to negative growth in the last five years.
The recent rally has stretched GE's already high valuation multiples. GE is currently trading at a PE (ttm) of 26.95 and a forward PE of 18.77, which are much higher than its peers. The price to sales ratio is at 2.25 while EV/EBITDA is above 20. While these multiples look expensive, the strong growth forecast over the next five years does provide some support to the valuation. However, expect some correction in the GE stock in coming days. GE currently has an RSI of over 90. RSI above 70 indicates that the stock is overbought and there can be corrections in the near future. (Also Read: Is General Electric Company Stock A Buy Now ?)
GE stock has outperformed the market since election results on the hope that the new President-Elect's policy proposals will boost the economy and benefit companies like GE who are heavily invested in infrastructure and oil and energy sectors. However, his stance on global trade and recent statements on global warming indicate that significant policy uncertainties remain. Luckily for GE, its vast global presence helps in diversifying its political risks emanating from a single country.
The recent rally has pushed GE stock into the overbought zone and has stretched its valuations. Investors can expect a pullback in the coming trading sessions. However, the long-term growth story remains intact. Also, GE stock has a generous yield and the dividend is likely to grow in the future. Long-term investors should use the pull back to go long the stock.