3 Reasons General Electric Company’s Stock Could Rise

Here's what could power GE's stock in the years to come.

Aug 20, 2014 at 11:27AM

A stock market darling of the '80s and '90s, General Electric (NYSE:GE) lost some of its cachet over the past decade. Shares in the manufacturer have lagged the S&P 500's return by 100% during that stretch.

But lately, GE's management team has been refocusing and reenergizing (literally) the company's portfolio of businesses. A smart acquisition and banking spinoff could lead the market to reevaluate GE's long-term prospects. While it's no guarantee, shares of GE look poised to outperform for three important reasons:

Reason 1: GE made a huge power play


GE's 9HA gas turbine. Source: General Electric

In the second-quarter of 2014, GE shook hands on a big merger focused around the power business of France's industrial outfit Alstom. GE paid a hefty sum – just shy of $17 billion – but walked away with an opportunity to become a more dominant player in the global turbine market.

Since scale really matters in the energy sector, the Alstom tie-up adds heft in areas where GE needed it most. For example, Alstom's heavy in geographies where GE has traditionally been light: The Paris-based company derives 85% of its revenue from outside North America and 80% outside of Western Europe. Likewise, Alstom will add 35% more capacity to GE's overall power generation business, and 75% of that capacity will come from steam turbines rather than gas.

Most importantly, this transaction has both short and long-term benefits for GE. Right off the bat, GE estimates Alstom will add about $10 billion of revenue in highly coveted growth markets. Down the road, the integration of Alstom is expected to provide GE with an additional $600 million in operating income and $1 billion in cost synergies by 2016. As my colleague Asit Sharma has pointed out, that would imply a return on investment of 12% on the Alstom assets, which towers over GE's 4.6% return on industrial assets in 2013.

The new GE is not one to make blockbuster acquisitions, but the Alstom merger aligns well with the company's goals and should greatly enhance the energy side of its portfolio, as I'll discuss under Reason 2.

Reason 2: GE's no longer a bank

The Alstom deal has broader implications because it helps GE reshape itself into the manufacturer that it wants to be (and once was). GE's in the process of pivoting away from banking, a step-by-step ordeal that just received a much-needed catalyst. Coupled with the recent spinoff of GE Capital's retail finance arm, it's almost a certainty these two moves will be received favorably by the market.

Synchrony Financial

GE recently spinoff its North American retail finance unit as Synchrony Financial. Source: General Electric

To understand why investors might reward GE's stock with a higher premium, think about these stakeholders as you might think of GE's customers. If GE's trying to do business with customers who are interested in jet engines, would it boast about its experience in lending? Probably not. Perhaps to the extent that it might help that customer with financing their purchase. But that's basically the only purposeful role for GE Capital going forward.

To continue with an analogy, however, if an investor is interested in buying shares of a manufacturing company, that investor's probably not fond of one that derives half of its income from banking. And that's where GE stood nearly 7 years ago.

With the addition of Alstom and separation of Synchrony Financial, GE's CEO Jeff Immelt expects that he will be able to boast about 70% of GE's earnings stemming from industrial operations by the end of this year. By 2016, their estimate increases to 75%.

This will come as a relief to investors who have been watching GE try to turn that corner for some time now. As I've noted before, with each step GE makes toward a more industrial-focused portfolio, the market tends to reward the stock with a more handsome valuation. That's why GE's price-to-earnings multiple has expanded by 29% since 2009.

The market's increasingly optimistic about GE's stock even as the company's moving from a higher margin banking business to lower industrial margins. In 2013, for example, GE Capital's segment margin stood at 18.7% versus 15.7% for the industrial and energy businesses.

But investors appreciate the fact that GE's sticking to what it knows best, which is manufacturing products. And in that arena, GE still has some ground to make-up relative to its peers: The industry's average P/E ratio stands at 19.6 versus GE's 17.7. But as GE's transition continues to take shape, expect that gap to close and bolster the stock price.

Reason 3: GE's poised to prosper from global growth

Shanghai At Dusk Copy

A view of Shanghai at dusk. China's soaring population growth will bolster demand for power generation, an area GE has been heavily investing in. Source: Flickr/whiz-ka

The final reason GE's stock could rise has to do with external factors that are moving in the right direction for the company. These are less near-term in nature, and relate more to positive developments that could take a decade to unfold.

With this in mind, let's take a step back and consider what GE lays out as its top priorities as a company: In its mission, GE's ultimate goal is to "build, move, power, and cure the world." That's a bold and admittedly broad statement, but we can see how a vision like this takes shape by zooming in on one industry, like power generation.

Consider GE's goal to power the globe. The company recognizes that the world is rapidly moving toward cities and will continue to do so. By 2030, the United Nations estimates that there will be 668 cities of at least 1 million residents, an increase of 36% over today's total of 488.

That sort of massive population growth in urban areas will radically shift the world's demand for energy – and most of it will come from developing countries. The International Energy Agency estimates, for example, that more than 90% of net energy demand growth to 2035 will arise from emerging economies.

These are exactly the types of places where GE's gaining traction through its purchase of Alstom, whose operations lie beyond GE's traditional U.S. and European strongholds. China, for example, is home to 20% of Alstom's installed global capacity, but the country generates only 4% of its power from natural gas today. What's more is the Energy Information Administration estimates that China's natural gas reserves could be 50% higher than that of the United States at 36.1 trillion cubic meters.

It comes as no surprise, then, that GE's aligning itself with trends that could have a big payoff for its bottom-line, and ultimately, shareholders. Combine sizable population growth with vast untapped resources, and a company like GE can create tremendous value in emerging markets.

The takeaway for investors

GE is making inroads in energy that are reshaping the company's portfolio, removing risks associated with banking, and translating to faster growth for a $146 billion behemoth. But energy's just one slice of the pie. As billions of citizens create a larger, global middle class, odds are they'll look to GE for additional needs, like transportation, air travel, and access to high quality health care.

There's reason to believe GE's early bets in these areas will pay off handsomely for investors.

Can GE's dividend match up with the best?
The smartest investors know that dividend stocks like GE tend to crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Isaac Pino, CPA owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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