Why You Should Plug Into General Electric

NEW YORK (TheStreet) -- General Electric (GE) has been in the headlines recently because some analysts contend the company needs a major overhaul.

Chief Executive Jeffrey Immelt, who has led GE since since 2001, may step down sooner than his expected 20-year tenure and GE's board is now considering shortening the standard term for its CEOs, according to The Wall Street Journal.

But for now, it is still Immelt's show to run. And following GE's strong first-quarter earnings report, which shows a meaningful outperformance over conglomerates such as Honeywell (HON) and Danaher (DHR), investors would be wise to plug into General Electric's new direction. The company is demonstrating that "boring" is not the enemy of profitability.

On Thursday, General Electric posted a 12% rise in overall industrial profits. The company's strength in businesses such as jet engines, gas turbines and oil industry equipment offset weakness in areas such as transportation and health care. Excluding one-time items, the company delivered operating earnings of 33 cents per share, topping average estimates of 32 cents.

Overall revenue fell 2% to $34.18 billion, slightly missing estimates of $34.36 billion. The big story, however, was the progress management is making in transitioning the business from its financial unit to establish more of a focus on GE's traditional manufacturing businesses. The latter segment, which posted 8% revenue growth, is by far GE's strongest.

In fact, the company posted 14% revenue growth in both aviation and power/water segments, its two largest industrial businesses. GE's oil and gas division posted a 27% revenue increase. As strong as these numbers appear, I don't believe management, particularly Immelt, has gotten enough credit.

Given the breadth of GE's end-markets, which it has achieved from various acquisitions, there have been complaints about GE's weak organic growth. This is the metric that measures a company's operational performance using only internal resources and excluding events like acquisitions.

For the first quarter, General Electric delivered organic growth of 8%, twice the average estimate, which was for growth of 4%. What's more, that the company posted a profit margin of 13.4%, which expanded by 50 basis points, suggesting that management's decision to focus on its industrial segments is paying off.

Management is executing on both its global growth strategies and productivity initiatives by reducing costs. Equally and perhaps more importantly, GE is no longer reliant on its weak GE Capital finance unit. And when you factor in the confidence shown in management's guidance, which calls for 10% growth in industrial profits, this is a company that is operating on all cylinders.

At this point, it's foolish to continue betting against GE. There is nothing boring about being consistently profitable. If this company can grow its revenue at a long-term rate of 4 to 5%, these shares should reach the low $30s in the next 12 to 18 months. This is also assuming a return to the low teens in free cash flow margins.

Factoring in the strong improvements in management's transition to an industrial focus, General Electric, which pays a yield of 3.4%, will also improve its ability to return capital to shareholders. At around $26 per share, GE is one of the few conglomerate bargains that are left. And CEO Immelt should be left alone to continue what he's started.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

If you liked this article you might like

General Electric Will Take a Big Profit Blow as It Restates Its Earnings

General Electric Will Take a Big Profit Blow as It Restates Its Earnings

Time to Sell UPS Stock and Buy FedEx Instead?

Time to Sell UPS Stock and Buy FedEx Instead?

Watch Jolt: Snapchat's Stock Gets Shredded While GE's CFO Sorta Shines

Watch Jolt: Snapchat's Stock Gets Shredded While GE's CFO Sorta Shines

UTX Stock Gains as CEO Proposes Selling $107 Billion Company for $81 Billion

UTX Stock Gains as CEO Proposes Selling $107 Billion Company for $81 Billion

Jim Cramer: The FAANGs Are Overbought, but the Industrials Aren't

Jim Cramer: The FAANGs Are Overbought, but the Industrials Aren't