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A New Look for General Electric
08/15/2014 8:00 am EST
This recommendation-among our top US stock ideas-is one of the world's largest manufacturers; it makes machinery for power generation and distribution, such as turbines, as well as other products, like jet engines, medical equipment, appliances, lighting, and locomotives, observes Pat McKeough, editor TSI Network.
General Electric (GE) saw its shares drop from $42 in 2007 to under $6 in 2009, as the financial crisis caused big losses at its banking division.
In response, the company decided to shrink this business's assets to half of what they were before the recession. It expects to complete these cuts by the end of 2014.
Meanwhile, GE is expanding its industrial operations, mainly through acquisitions. That's generally riskier than internal growth, but these businesses have unique technologies that offer competitive advantages.
The company scaled back its GE Capital after the division suffered big losses in the 2008-09 financial crisis. It now accounts for 30% of GE's revenue and 37% of its earnings.
GE Capital will soon unload its North American consumer lending business as a separate firm called Synchrony Financial (SYF).
This is the latest in a string of non-industrial businesses the company has sold in the past few years. In 2013, it sold its remaining 49% stake in TV and movie producer NBC Universal for $16.7 billion.
GE is using the cash from its asset sales to expand in faster-growing areas, such as making oil and gas drilling gear. In the past seven years, it has spent $14 billion buying other companies, such as Texas-based Lufkin Industries in 2013.
As well, GE has just finalized a major new alliance with France's Alstom SA, a leading maker of parts for power plants. The deal will give GE greater access to fast-growing markets like China, which uses many of Alstom's products in its power plants.
Meanwhile, GE continues to develop new products. It spent $4.75 billion (or 3.3% of its revenue) on research in 2013, up 5.1% from $4.5 billion (or 3.1% of revenue) in 2012.
GE's strong balance sheet will support these investments. The company is also using its improving earnings to buy back shares. It spent $1.5 billion on repurchases in the first half of 2014 and still has $10.9 billion remaining in its current authorization.
The stock trades at 15 times likely 2014 earnings of $1.67 a share. It also trades at an attractive 13.9 times its forecast 2015 earnings. GE's improving earnings should give it more room to increase its $0.88 dividend, which yields 3.5%. GE is a buy.
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