GE Shares Still Have Plenty of Upside, Despite Their Recent Rally
Shares of iconic blue-chip industrial heavyweight General Electric (GE) - Get Report rose more than 20% in the past 12 months and are near their highest level in eight years.
The company is an expanding, highly diversified, global industrial giant with a market value of nearly $300 billion, and it is setting a course of sustained long-term growth after significantly restructuring its asset portfolio.
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GE's earnings have beat Wall Street expectations for at least the past four quarters.
There is no stopping GE's relentless growth engine. With its upcoming second-quarter earnings in the spotlight, analysts' are ready for a reprise from this member of the Dow 30.
Earnings are expected to have jumped 48.40% to 46 cents a share on revenue of $31.53 billion, up 7.5% from a year earlier. This pace of growth, if realized, would place GE at the top of the large industrials sector.
Meanwhile, Honeywell International is expected to report an 8.6% rise in earnings and a 3.6% increase in revenue; Illinois Tool Works is projected to see a 7.7% rise in earnings and a drop in sales; Ingersoll-Rand's earnings are seen having risen 8.3% with a 2.7% revenue increase; and 3M's earnings growth is forecast at 2.5% on flat revenue.
Citigroup suggests "another sloppy quarter" for industrial stocks but considers GE a top pick.
Industrial companies could very well spook investors by offering a downcast commentary and restricted visibility amid the post-Brexit atmosphere of perceived gloom.
However, fundamentally speaking, the composite industrial landscape isn't that dismal.
GE with its excellent portfolio should deliver steady growth, but bear in mind that this will come at a premium. GE's exposure to aerospace, health care, the Internet of Things, and robotics and automation provides momentum.
These emerging areas of dynamic progress are all expected be the money-makers of tomorrow, and at GE, they are all already demonstrating healthy results.
Meanwhile, there is a lot riding on GE Digital. Even as rivals such as Honeywell look to prime growth by ramping up acquisition activities and 3M smooths supply chain issues, GE Digital is a tour de force for the parent company, with a definite long-term perspective.
Digital could potentially add ballast to GE's service business, which represents nearly 80% of the company's profits, according to Citigroup.
GE also is making rapid strides with its Predix platform for the industrial Internet segment.
Chief Executive Jeff Immelt's goal of paring down GE's once-sprawling lending business has almost been achieved, so the company can focus its energy on industrial and digital manufacturing parts.
The digital business could transform GE into an unbeatable global giant in the industrial space, as the Predix and related application platform unleash a huge and hitherto untapped revenue opportunity in hardware, services and software.
For many smart investors, GE has always been a no-brainer. The company boasts a rising dividend yield (the biggest in its peer group), annual free cash flow of $12 billion to $15 billion, a healthy balance sheet and the ability to maintain margins with cost initiatives.
With an expected five-year annual price-earnings-growth ratio of 1.70, buying GE shares makes sense because it is trading at a discount to Honeywell, Illinois Tool Works, Ingersoll-Rand and 3M.
The bottom line: GE is a safe and high-quality investment opportunity that should continue its upward trajectory, driven by its industry-beating growth possibilities and inexpensive valuations.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.