Stock of the Week
NYSE Symbol: GE
Price as of 9/11: $26.02
The resilient market continues. The markets continue to chug along without any more than a 1% to 2% pullback. We eventually will get a 10% correction once again, but for now the markets keep slowly grinding higher. Interest rates are starting to back up once again. Billionaire, David Tepper last week made a market comment saying the bottom was in for interest rates. Mr. Tepper has made a career of not being wrong. Trying to find undervalued stocks in this market is difficult to say the least. In decades past when I've had similar struggles to find good value has been a red flag for market valuations. In the meantime, I continue to invest defensively buying blue chip dividend paying stocks that hopefully will hold up well in any eventual correction. This week we'll highlight a large cap Industrial giant spinning off and selling divisions to unlock value and improve shareholder value. The stock of the week is General Electric. General Electric is in the process of shedding its image as a financial giant going back to its roots as an industrial firm. In August, GE spun off of their financial arm, Synchrony Financial, and more recently found a buyer for their appliance unit. These moves long term, should boost the share price for GE. In the meantime, investors can continue to collect 3.5% dividend with an ex-dividend date next week.
Back in July, General Electric reported in-line earnings and sales. Revenues rose 3.3% year over year. The future of the company, the Industrial segment saw profits rise 9% in the second quarter to $4.2 billion. The Industrial segment margins expanded 20 basis points over the prior-year period as revenues grew 7%, with organic growth of 5%. Growth market revenues were up 6% for the quarter, and growth market orders rose 14%, with increases in six of nine growth regions. GE's backlog of equipment and services at the end of the quarter was $246 billion, up $23 billion over the year-ago period with increases in every segment. The recently acquired Alstom's Power and Grid business should be accretive to earnings in 2015, and add $0.06 to $0.09 per share in 2016. This will accelerate the GE's portfolio strategy to achieve 75% of earnings from its Industrial business by 2016. Meanwhile, GE Capital continues its strategy to decrease the size of its non-core portfolio. The century-old appliance unit wasn't carrying its weight. Although that segment accounts for roughly 6% of General Electric's revenue, it produced less than 2% of total profits, and revenue was rapidly eroding. With less than 4% in operating margin, selling the unit to Electrolux for $3.3 billion was a homerun for GE. CEO Jeff Immelt will get an extra $1.3 billion cash infusion while General Electric can now focus its attention on the industrial business and International growth.
The stock price has been in a tight range for the last year between $28 & $24 a share. At around $26 a share the stock trades for 15 times earnings, 14 times 2015 earnings, 1.7 times sales, and 1.9 times book value. Clearly GE is trading for less than a market multiple. These recently moves to spin off and sell off divisions, plus further boost profit margins should not only improve earnings per share, but also raise the stock's PE to a market multiple. These moves should boost the stock closer to $30 a share. Currently, Credit Suisse has a price target of $30 a share while Bernstein's price target is $33. And while you wait for the stock to appreciate, investors collect the 3.5% dividend.