Editors' Pick: Originally Published Thursday, Dec. 17.
At a briefing for analysts and investors in Manhattan this week, General Electric (GE) - Get Report CEO Jeffrey R. Immelt said that he expects the industrial juggernaut to contend next year with a torrent of headwinds: geopolitical conflict, economic uncertainty, market volatility, sluggish growth, and a strong dollar.
And yet, through it all, Immelt confidently predicted that GE would deliver double-digit gains in earnings-per-share (EPS) in 2016. With a market cap of $290.21 billion, GE is exactly the sort of buy-and-hold stock that's suited for a long-term wealth building strategy. So, what's up Immelt's sleeve?
At his presentation to Wall Street insiders, the CEO explained that GE's strongest businesses, particularly jet engines, should enjoy sufficient demand to compensate for weaknesses in cyclical segments such as oil and gas. Left unsaid was the tremendous multi-year demand for aircraft engines from one source: China.
Since the 2008 financial crisis, GE has been pivoting back to its industrial roots and shedding its financial activities. Immelt stated that GE's goal is to derive 90% of profits from industrial segments by 2018, compared with 58% in 2014.
Jet engines are a GE forte. The segment is experiencing huge demand in both commercial and military sectors. But the press rarely discusses that China, the world's second-largest economy, will be a key customer for GE's jet engines, driving profits for years, if not decades, at the company.
Notably, GE recently won a contract to supply engines for the C919, built by China's state-backed Commercial Aircraft Corporation of China (COMAC). The C919 is China's largest passenger plane.
In November, COMAC rolled out the first C919 at its new plant next to Shanghai Pudong International Airport, announcing that the twin-engine aircraft was scheduled to make its first commercial flight in 2016.
No longer content with importing aircraft, China is now striving to become a world-beating aviation manufacturer. COMAC has broken ground on an aircraft assembly plant near Shanghai that's capable of producing 20 of the large homegrown C919 jets, as well as 50 regional ARJ21 jets per year by 2016. GE is a major technology partner in this endeavor.
In China's 12th Five-Year Plan (2011-15), the central government stipulated that aviation must be a pillar of the country's economic and military development. China wants to boast of a top-shelf, indigenous aviation sector that matches its emergence as a world power.
As part of this bold initiative, China is taking on the two giants that dominate worldwide aircraft manufacturing: Boeing and Airbus. And the biggest beneficiary of China's soaring ambitions: Fairfield, Conn.-based multinational General Electric. It's another reason GE is among a group of stocks tapped into unstoppable trends, making it suitable for long-term growth portfolios.
China may have codified its aerospace pretensions in its latest five-year plan, but it can't magically create in a relatively short amount of time an industrial base capable of producing world-class engines and other sophisticated aviation gear. GE has shown a sustained willingness to extend a hand. GE is not only the world's largest manufacturer of aircraft engines, but it's also a leading maker of aeronautical components and electronics. The company's established footprint in China gives it an advantage over engine making competitors such as United Technologies.
China's gross domestic product growth may be slowing, but its aviation ambitions remain intense and on track, which makes GE stock a great choice for investors with a long-term horizon.
The aviation industry's recovery this year has been driven by overseas activity, especially from China, which now stands as the world's fastest-growing aviation market.
Boeing anticipates demand for $4.5 trillion worth of passenger jets over the next two decades, with about two-thirds of new planes sold in the Asia-Pacific region. In value terms, China is the single biggest regional market. China now has more than 40 new airports under construction. The combined fleet of China's state-run airlines, currently about 2,600 aircraft, is predicted to expand to 4,500 by 2016.
As GE continues to streamline its overall operations and return to its engineering and industrial origins, demand from red hot aviation sectors such as China will provide a sustained revenue boost, more than compensating for the economic vagaries and risks in North America and Europe.
Despite the high barriers to entry in the aircraft original equipment manufacturer (OEM) field, the Chinese have set a goal of manufacturing large passenger jets with more than 150 seats and freighters capable of handling more than 100 tons of cargo. After delivery of its first C919 passenger jet, China will begin manufacturing even bigger jets with 250 seats.
Despite a strong dollar, overseas headwinds and the collapse of the energy sector, General Electric posted third-quarter operating results that bode well for 2016 and beyond. To be sure, the company reported a 29% year-over-year decline in EPS, to 25 cents. Depressed demand for the company's oil and gas equipment was the major factor. However, third-quarter EPS exceeded the consensus estimate by 3 cents.
Significantly, the company reaped a 5% year-over-year growth in industrial profits. The strongest performer was revenue from GE Aviation, which increased 5% year-over-year. GE Aviation makes the ultra-quiet and energy efficient GEnx engine, increasingly popular with airlines around the world. That's why, despite the many storm clouds on the horizon for 2016, Immelt this week maintained a sunny disposition.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.