Waiting to See the Light

12/13/2013 11:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The recent restructuring announcement from this energy giant had little effect on the company's stock, writes MoneyShow's Jim Jubak, also of Jubak's Picks, who thinks many investors are waiting for all the details.

General Electric (GE) has announced that it will exit the part of GE Capital that provides store credit cards at retailers in North America, beginning in the first half of 2014. The exit will begin with the initial public offering of a 20% piece of the North American retail finance business. General Electric will hold the remaining 80% of shares from that IPO until 2015. At that point, the company will swap its shares in the retail finance business for shares of General Electric. The cash raised in the IPO will stay with the retail finance business to support that business. The company said it will take a $500 million restructuring charge for this, ahem, restructuring.

What's amazing to me, is how little negative effect this announcement has had on General Electric's shares, given the complexity of the plan, and given widespread assumptions/wishes that General Electric would move more quickly to shrink GE Capital. The stock, at its December 12 close of $26.54, is down, only fractionally, from the $27.22 closing high on November 18 and the near-high of $27.19 on December 9.

I think this is an indication of how attractive investors think General Electric's mix of industrial businesses is in the current global economy. And I think that it's an indication that the company's annual investor outlook meeting, on December 18, stands a good chance of pushing the stock higher, as management gets a chance to explain the complicated GE Capital strategy and to lay out its plans for improving profit margins in General Electric's business. (General Electric is a member of my Dividend Income portfolio.)

I think the latter explanation is likely to have more influence on the stock price (although investors are likely to look favorably on a plan, even if it takes longer than expected to implement, that removes the retail finance business as a drag on earnings).

Organic revenue growth in the industrials segment has been decent and the potential for higher revenue growth (a projected 3% to 6% growth in industrial sales in 2014), as the company expands its global footprint, is an attractive story for investors, but General Electric has had a margin problem in its industrial businesses. Its margins, in fact, lag those of its peers. General Electric has had an answer to that—higher R&D costs, a build out of its global presence, and the cost of acquisitions—but 2014 is getting very close to show me time.

I expect that the December 18 investor outlook meeting will provide more detail on plans to boost margins through cost cutting by, something like, 70 basis points in 2014, to further cut SG&A expenses. The likely effect would be an increase in profit growth from the industrial business to, something like, 9% in 2014, from 5% in 2013.

Based on those efforts, I calculate a $30 target price for General Electric shares, by June 2014. The shares pay a 2.9% dividend, with a good chance for a dividend increase in December. I think that's a good, low-risk, total return package.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of General Electric as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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