GE's Outlook Not Enough to Excite Analysts (Update 1)

Updated from 10:03 a.m. ET to include GE Capital's contribution of 47% of the parent company's third quarter operating earnings, rather than the unit's 57% of net earnings, since GE's goals are based on operating earnings and not net earnings.  Also updated to include comments from Citigroup analyst Deane Dray.

NEW YORK (TheStreet) -- General Electric (GE) has been making significant progress toward its goal of improving efficiency and margins, while making more efficient use of capital as it shrinks GE Capital, however, the investor goals outlined by the company on Wednesday left some analysts unimpressed.

One of GE's most important long-term goals is to lower its liquidity risk and unlock value for its shareholders by moving back toward a stronger focus on its industrial business.  The company's financial arm provided 47% of its operating earnings during the third quarter of 2013, but GE CEO Jeff Immelt's long-term goal is for GE Capital to contribute roughly 30% of the parent company's operating earnings, with various industrial businesses providing the other 70%. GE on Wednesday said it was on track to achieve this goal by 2015.

Other goals and expectations outlined by GE on Wednesday included organic industrial growth of 4% to 7% in 2014, the deployment of roughly $90 billion in cash through dividends, share buybacks, acquisitions and organic growth from 2014 to 2016, and an expansion of the company's industrial profit margin to roughly 17% by2016 from the current 15.8%.

The company is also looking for its return on capital to increase to 17% by 2016 from 15% today.

GE Capital

GE had already made tremendous progress in shrinking GE Capital, with the unit's "ending net investment" (ENI), excluding non-interest bearing liabilities, cash and equivalents, declining to $385 billion as of Sept. 30, from $425 billion a year earlier.

But the company in November announced it would would spin off its North American consumer finance business through a transaction that will be tax-free to GE shareholders and include an initial public offering of up to 20% of the equity in the new company. GE expects to complete the IPO "later in 2014," after which it will complete its exit from the consumer finance business through a tax-free distribution of the remaining 80% of the new company to GE shareholders during 2015.

Shedding more financial services assets not only improves GE's liquidity profile, it frees up more capital for eventual return to investors through dividend increases and/or share buybacks.  GE last week raised its quarterly dividend on common shares to 22 cents from 19 cents, for a yield of 3.21%, based on Wednesday's closing price of $27.41.

GE during the first three quarters of 2014 returned $13.9 billion to investors through dividends and buybacks.  Please see TheStreet's earnings overage for details on the company's third-quarter results. 


Analysts React

"The 2014 targets were broadly in line with expectations, with a bit better organic growth at the high end," according to JPMorgan Analyst C. Stephen Tusa, who has a neutral rating on GE, with a $26 price target.

Tusa in a note to clients Thursday said, "we see the story transitioning back to end markets/EPS, where top line growth (rather than restructuring) is likely needed to drive earnings upside versus expectations - this is a more balanced risk/reward relative to the 'self help' thesis that has driven the stock over the last 1-2 years."

BernsteinResearch analyst Steven Winoker rates GE "market perform," with a $27 price target. 

"Top line 4-7% industrial segment guidance for 2014 is better than peers this reporting season, and while we have heard this same better than peer number in prior years only to fall short, this one does seem more believable to us," Winoker wrote in a client note on Wednesday, although he also noted that "for more than a decade, our measures of productivity at GE underperform other industrial peers (investing in growth without getting it really)."

Winoker wrote that "as much as we like elements of the company's story, we believe the premiums we are applying [to get to the $27 price target] are appropriate at this point and have a challenge seeing EPS going much beyond our $1.81 number in 2015 (perhaps another 10% to $2 with additional buybacks, M&A and flow through of cost reduction to margins faster). That would be required for us to drive our target price higher."

Citigroup analyst Deane Dray is more upbeat, writing in a client note Friday that "GE's record $229 bil backlog and late-cycle
earnings visibility position it nicely at this point in the cycle."

Dray reiterated his $32 price target for GE and said the stock remained his "top pick" among diversified industrial companies.  His price target for GE "assumes the shares trade at a 5% discount to our 17.0x target  group multiple on 2015E EPS. GE's historical relative P/E range versus peers is a 25% discount to a 5% discount."

Citigroup estimates GE will earn $1.70 a share during 2014, with EPS rising to $2.00 in 2015. 

Shares of GE have returned 34% this year through Wednesday's close.  The shares trade for 15.8 times the consensus 2014 earnings estimate of $1.73 a share, among analysts polled by Thomson Reuters, and for 14.6 times the consensus 2015 EPS estimate of $1.88.

GE's stock was down 0.7% in late morning trading to $27.00.

The following table shows GE's outperformance this year against the Dow Jones Industrial Average and the S&P 500 :

GE Chart
GE data by YCharts

Interested in more on General Electric? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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