General Electric (GE) is the only remaining member of the original 12 stocks that made up the Dow Jones Industrial Average in 1896. Despite its iconic role in American industry, GE has been the worst performing Dow stock this year — down over 20% year-to-date – and many on Wall Street remain pessimistic on the shares. Nevertheless, four value-oriented experts and MoneyShow.com contributors see potentially better days ahead.
Jim Powell, Global Changes & Opportunities Report
One company that definitely fits the value description is
The company makes everything from locomotives, to jet engines, and medical equipment -- to name only a few products.
However, GE’s 125-year history has not been without setbacks. Every few years, the company makes a big mistake or is blindsided by economic changes that push its profits – and its stock price – down sharply. One such drop started in late-2016 — but I think it’s now coming to an end.
GE’s biggest mistake in recent years was getting into the financial service business just before the industry went belly up in the 2007 to 2009 banking and housing crash.
It didn’t help that
The company also invested heavily in oil and gas equipment just before the $149 a barrel oil price took a nosedive to just $38 in 2014. Ouch again!
Other mistakes hammered GE during the Great Recession. Now the financial service business is largely gone. A week ago, GE also announced that it sold its troubled industrial solutions operation.
The price of oil is taking care of itself. Brent crude went from a 52 week low of $45.19 to today’s $56 a barrel — a 25% increase. Most of the company’s other problems are also on the mend.
At the same time, GE’s new president, John Flannery, is refocusing the company on its industrial roots, health care, aerospace, renewable energy, and other traditional strengths. The appointment of Ed Garden of Trian Fund Management to GE’s board may further strengthen the company’s outlook.
GE’s stock is down some 20% just this year, which continues a long slide. However, the price ticked up over the past month, and may mark a new trend. If not, the long-term probability of seeing another turnaround for this blue chip leader is about as high as you will find anywhere on Wall Street.
Accordingly, for long-term conservative investors I am changing my OK to Buy on GE to Strong Buy.
Benj Gallander, Contra the Heard
When writing about General Electric in May we stated, “We remain impressed with the way that CEO Jeffrey Immelt has dealt with the pressure of trying to execute his corporate transition. But some bears are growling louder that his 15-year tenure is in extra innings and it’s time to call to the bullpen for a younger arm.”
Specifically Trian Fund Management was mentioned as being the organization that could make push come to shove. They have, and now have a member on the board.
Immelt is out and the new CEO John Flannery is already cleaning house with three other top dogs kicked to the curb. Many other people will likely be let go.
Given GE’s performance this year, it will almost certainly qualify as a Dog of the Dow pick for 2018. Flannery will be making many more modifications to avoid this ignoble state for 2019.
Immelt radically transitioned the organization and certainly there are questions whether that was effective. Transformation can be a great thing, but the risk is change for the sake of change.
Expectations are that there will be lots of cuts on the expense side of the ledger. From this angle that is a foregone conclusion. Ideally there will be short-term pain for long-term gain. If done correctly, the bottom line will be padded.
One area that we hope the new management does not go is a dividend cut, which has moved up smartly in recent years. If a chop occurs, it will likely dim the stock price. That is one of the major dangers right now for investors like us who do like our income via payouts.
In 2016, GE returned more than $30 billion to shareholders in dividends and buybacks and we were happy to collect our share. We’re banking on more to come.
Long term the feeling from this angle is that GE will offer excellent rewards for patient investors. Our gain has been reasonable thus far, having purchased the stock at $15.56. Plus dividends have enhanced our return. Our initial sell price target is $35.24.
Bob Ciura, Wyatt Research's Daily Profit
In a major transformation, General Electric has sold off the bulk of its massive financial arm, GE Capital, and it also has a new CEO.
GE has suffered from weak performance across many of its markets, especially oil and gas. Investors have sold the stock as a result. With the stock hammered in 2017, it could be a buying opportunity.
GE, whose roots date back more than 100 years, today has annual revenue of approximately $180 billion. GE’s market capitalization is over $200 billion.
The industrial behemoth is exposed to virtually every industrial business line in the global economy. Its businesses include power, aviation, oil & gas, health care, transportation, lighting and renewable energy.
No business can last longer than a century without reinventing itself from time to time, and GE is no different. Over a decade, GE’s financial business, GE Capital, became more of a liability than an asset.
GE Capital nearly brought GE to the brink of collapse during the 2008 financial crisis and it lost over $1 billion last year alone. GE’s growth had ground to a halt.
Organic revenue was flat in 2016, as were GE earnings. Now, it could come back to life. As it offloads most of GE Capital, GE becomes more efficient. GE Capital did not have consistent profits. The “new” GE Capital will carry much less risk.
Now the company is nimbler and more likely to generate growth as it focuses on its core businesses. Demand for GE’s industrial products and services remains strong. It ended last quarter with a nearly $330 billion backlog.
GE’s oil and gas business were hammered last year with revenue falling more than 20%. But now, oil and gas prices are on the rise, And, GE has seen continued growth across its other businesses, including health care.
GE’s organic revenue increased 4% in 2017’s first half, and operating profit rose 11% in that period. For 2017, GE expects organic revenue growth of 3% to 5%. On an adjusted basis, earnings are expected to grow 7% to 14% for the year, to $1.60 to $1.70.
Plus, GE’s huge divestments have GE flush with cash. It is using a significant portion of the proceeds to return cash to shareholders. GE returned $7.8 billion to investors over the first half of 2017, $3.6 billion of which was through share repurchases.
In addition to share repurchases, the GE dividend yield is a hefty 4%. And, the dividend is fully covered by earnings.
Using its forecast of earnings for 2017, the current annual dividend of $0.96 represents less than 60% of EPS. This could even leave room for future GE increases, since GE’s earnings are likely to grow.
The bottom line is that while GE’s stock has declined this year, the stock has a much better outlook. Investors can use the market’s short-term pessimism to buy this high-quality blue-chip stock at a discount.
Chuck Carlson, DRIP Investor
Let me say this right upfront; I am not recommending a buy in General Electric stock – yet. I think it is still too soon to be buying the industrial conglomerate.
I expect year-end tax selling to bring these shares down even lower over the next few weeks and months. Having said that, I am becoming more interested in the stock. The reason? Mean reversion.
Indeed, GE is currently the worst performing stock in the Dow Jones Industrial Average this year, and by a pretty wide margin. Typically, the worst performing stock in the Dow one year has a nice snap-back performance the following year.
Another reason the shares are becoming more interesting to me is the dividend yield of nearly 4%.
Again, I think it is still a bit early to buy. But come late December/early January, bargain hunters may want to zero in on this value play. My guess is that 2018 will be a much better year for the stock than 2017.
Please note GE offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company.
