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General Electric: A Smart Buy
Posted by: Vinay Singh (IP Logged)
Date: May 22, 2014 04:45PM
Over the past few years, General Electric (GE) has posted robust growth in several business divisions. The company expects to report a strong performance this year as well, especially in the health care division. Sales from this division have grown at a CAGR of 4.5% over the last three years. Going forward, based on GE's strong focus on research and innovation, I expect the company to continue reporting consistent growth.
The rapidly growing demand for aircraft engines and oil and gas equipment is likely to push GE Capital’s backlog to a skyrocketing $216 billion.
Noticeable Trends in Key Segments
The Power & Water segment witnessed a massive decline of 26% in sales. A considerable drop in demand for wind turbines globally, particularly in Europe, contributed to the decline in sales. Within the U.S, recoiling natural gas prices resulted in a low demand for wind turbines; hence, it poses a huge threat to potential investment inflow for wind farms.
Other segments, which include Aviation, Transportation, Healthcare and Oil & Gas, reported moderate numbers. Within the Aviation and Oil &Gas segments, orders grew 47% and 24%, respectively. The increase in orders is predominantly underpinned by a rapid increase in demand for new aircrafts from airlines. This also led to higher shipment volumes for airplane engines that are developed by General Electric.
In the Oil & Gas sector, where GE supplies drilling equipment, growth was reported on the back of rising global demand for Oil & Gas. The increase in demand is a result of higher energy consumption from emerging markets such as China, India and Brazil. It is noteworthy that the decline in the Power & Water segment was made up by growth in other industrial divisions.
General Electric’s Aviation competes directly with United Technologies' Pratt and Whitney Aircraft Engines. United Technologies generates the highest percentage of its revenue through UTC Climate, Controls & Safety at around 29%. This is followed by Pratt and Whitney Aircraft Engines and Otis Elevators at around 24% and 20%, respectively. The remaining revenue is generated through UTC Aerospace systems and Sikorsky Helicopters.
The Pratt and Whitney Aircraft division has a fairly positive outlook, as the company’s R&D is renowned for working towards developing ground-breaking aviation engines. Presently, the company develops F-135 engines for the U.S. Air force; in addition, it is also developing liquid fuel J-2X engines to facilitate NASA’s future plans of space exploration. Going forward, I expect the company to charge a premium on its products resulting in higher EBITDA margins. I believe with strong fundamentals and growing demand for its products, United Technologies is a solid investment option.
Within the Healthcare division, General Electric competes with Abbott Laboratories. Abbot generates the highest percentage of its revenue through Pharmaceuticals, at around 62%. This is followed by Nutritional and Diagnostics, at around 18% and 12%, respectively. During fiscal 2012, Abbott operated on an EBITDA margin of 44%; however, the diagnostic segment operated on an EBITDA margin of 36%.
According to the valuation offered by Trefis, the diagnostics segment, which competes with GE Healthcare, accounts for 14% of Abbott's stock price. Going forward, I expect Abbott to benefit hugely from its growing presence in emerging markets such as India, China and Brazil. Additionally, acquisition of companies such as Starlims Technologies and Ibis Bio sciences will enable it to enhance its presence in a niche space such as molecular diagnostics.
NBCU Transaction and Future Outlook
General Electric gained a healthy sum of $18 billion through the sale of its remaining share in NBC Universal. After the sale of its 49% stake, it earned $0.08 per share. It is noteworthy that the cash generated through this transaction will be distributed among shareholders in the form of dividends and share buybacks.
Additionally, the company plans to use the surplus cash to initiate operational restructuring for margin expansion. Through various cost cutting initiatives, such as shutting down several high cost yielding plants and reducing the employee count, the company was already successful in cutting down its industrial cost by $200 million. Moving ahead, the company expects the industrial cost-cutting initiative to yield $1 billion in savings by the end of this year.
GE Aviation presently holds a 27% market share in the global aviation industry. With constant innovation that has led to GE Aviation offering more fuel efficient engines, I expect its footprint to grow further in the aviation industry. However, increase in the aviation business will largely depend on the global growth of the aviation industry.
The health care division, which includes medical devices and equipment currently possesses a market share of 6.7%. General Electric is a pioneer in the medical equipment industry with exceptional commitment to innovation through R&D. Emerging economies such as India and China present a huge growth opportunity for the company. The penetration level of health care products is extremely low in the emerging markets and thus, I expect the company to increase its global health care market share by launching radically innovative products and push its market share to 10% in the future.
I believe the stock has the potential to appreciate going forward, and investors should consider holding GE in their portfolio.
Stocks Discussed: GE,
General Electric A Smart Buy
Posted by: WK1900 (IP Logged)
Date: June 16, 2014 05:13PM
I totally agree. GE has been around a long time and will be here when many corporations will fold. GE is diversified enough in its divisions and global growth. It is a smart buy compared to the over hyped newer stocks on the block. Still respectable growth exists in GE's future.
Stocks Discussed: GE,