- GE Stock has now gone below $30 a share. There is no point in catching a falling knife here.
- Its move into 3D printing could turn into a lucrative annual income stream of $1 billion by 2020.
- More synergies need to come from the Alstom acquisition and fast.
General Electric Company (NYSE:GE) has continued to fall since its second quarter earnings at the end of July. The stock is now trading at $29.85 which means it is down 7%+ since that earnings release. The stock is now trading at an earnings multiple of 28.2 which is slightly below the company's 5-year average. Nevertheless, with the stock pretty much trading at fair value, it is interesting that many analysts are taking a bullish stance on this stock. Why? Because long-term investors simply haven't got paid with this stock. In fact, since the turn of the century, GE has underperformed the S&P500 by over 80% which is criminal.
To make matters worse, the company has frozen the dividend for the last 8 quarters at $0.23 a share. Basically, any investor who invested in this stock between the years 2000 and 2007 are down on their money. In one way, GE's example should serve as a crucial lesson to all dividend investors which is this:
You can never do enough fundamental analysis on a company before investing
Why? Because if the stock goes against you, you may have to hold it for years until you see something remotely similar to an adequate return. GE's checkered career would be the main reason why I would be cautious in scaling into a position at present. In saying this, the company definitely has competitive advantages and gained momentum in 2015 by deciding to return to its industrial roots. It remains to be seen though whether the company can achieve pre-2000 like returns going forward.
GE Investing More Into Manufacturing
"Potential" in investing is a dangerous word. We have had more of it lately with GE's recent purchase of two additive manufacturers from Europe namely SLM Solutions and Arcam for $1.4 billion. The two companies' micro welding technology will definitely add value in this area. The acquisitions follow on from GE's purchases of Morris technologies and Rapid Quality Manufacturing in additive manufacturing and will definitely boost GE's manufacturing capabilities. Where is the potential here? Well, it is all about improving margins and consequently the bottom line.
Aviation has benefited the most up until now but bullish analysts believe more areas of GE's portfolio will also benefit shortly. Moreover, the unique advantages the above-mentioned companies bring to the table should mean that GE can really start upping the ante regarding equipment manufacturing. Bulls are stating that it will turn into another billion dollar revenue stream in the next few years but remember - haven't we heard this before?
The Alstom Acquisition Has Not Worked Out As Planned So Far
Secondly, after the company's pricey oil and gas acquisitions a few year ago, all eyes are now on Alstom synergies. Why? because GE forked out a whopping $10.1 billion last November to acquire the company. Personally, I would have liked to see more progress by now with reference to the Alstom division. Industrial operating margins, excluding Alstom, came in flat at 14.2% last quarter. Alstom would have dragged this number lower. Furthermore, there is going to come a time when GE will have to include Alstom's numbers in the quarterly figures and that is when investors may get a shock.
GE announced plans for the shutting down of some Alstom plants in June but recently has moved to shut its own manufacturing facilities which shows the current weak fundamentals of the industrial sector. Furthermore, GE is talking up its backlog (which will improve things at the back end of the year) but orders when we exclude Alstom were down 16% in the second quarter. A worrying statistic to say the least.
Shareholder Returns Are Predicted To Increase
A major bone of contention that existing GE shareholders have is returns, which have been poor in recent years especially compared to the likes of Honeywell (NYSE:HON). However, GE has definitely made a dent in its shares recently (8.96 billion currently outstanding) and aims to return $26 billion this year alone to its shareholders. $8 billion will be in dividends and a further $18 billion is share buybacks. I actually see the company doing these figures as it has already paid out $18.8 billion to shareholders through the first half of the year and free cash flow for the year is targeted to be in the region of $30 billion.
Balance Sheet Is Much Stronger Now Than A Few Years Back
Debt is another tool in GE's arsenal that can be used to gain more leverage in the industrial sector going forward. The company is no more a systematically important financial institution (SIFI) so the company will definitely have more financial leeway going forward. Furthermore, the company definitely has the balance sheet to do it. In its latest quarter, it reported a debt to equity ratio of 0.8 and total assets of $401 billion. On top of more financial flexibility, the company still has some asset sales to complete which will bring in more cash into the coffers by the end of this year. Again the question will be how this fresh capital (be it borrowed or from asset sales) will be deployed. If the company treats shareholders well, its dividend will attract capital. But again we return to "potential" as the jury is still out on the new look General Electric.
To sum up, I feel it is still too early to start scaling into General Electric. Its valuation is too high and the dividend is at the same level for the last 8 quarters now. Although the new look GE will be less diversified than before, the company has plenty of growth triggers especially in aviation but its oil and gas division continues to drag down profits. GE stock is still not a strong buy for me at present