NEW YORK (TheStreet) -- General Electric (GE) finally won its $17 billion bid for the assets of struggling French company Alstom (ALSMY). While this may have been a surprise to many investors and analysts, to GE CEO Jeff Immelt it was only a matter of when, never if.
GE stock closed Monday at $26.28, down 6% on the year to date. With its shares still down 35% from their 2007 high, investors should jump on GE now.
At the current price and with the potential synergies from Alstom, GE stock is a sure bet to reach $35 in the next 12 to 18 months assuming GE can grow its revenue at a long-term rate of 4% to 5%. And if Immelt can return GE to the low teens in free cash flow margins, $40 per share during that span is not out of the question, either.
With Alstom's assets entering GE's possession, the next 10 years of GE's growth are likely secured because aside from helping GE achieve its goal of returning to its industrial roots, Alstom's businesses will help GE gain exposure in untapped European markets.
My reference to Alstom's "assets" is not by accident. Recall, GE entered the deal wanting only the power business. But the opposition by the French government forced GE to agree to some concessions, including allowing the French government to retain a 20% stake in Alstom. Immelt also agreed to allow Alstom to keep a 50% interest in three energy joint ventures.
The way I see it, these were small prices to pay for having landed the prize of the whole deal.
When it was all said and done, GE has acquired all of Alstom's global gas and steam turbine equipment and services business. Combined, these businesses -- which have a large customer base in Europe -- generate more than $10 billion in annual revenue.
Immelt has been clear about his vision of GE as a global industrial power. In the most recent quarter GE posted 14% revenue growth in both aviation and power/water segments, its two largest industrial businesses. This is while GE's oil and gas division posted revenue gains of 27%. But it's about the future.
By also taking a 50% stake in Alstom's renewable energy business, GE now has a strong complement to its global position in onshore wind. Investors have taken this aspect of the deal for granted. But Alstom's renewable energy business, which has solid offshore wind technology, ranks No.1 in the world in hydro-electric turbines and generators. It also generates $2 billion in annual revenue.
The deal-making was anything but smooth. German rival Siemens AG (SI) made a counter-offer for Alstom, partnered with Mitsubishi Heavy Industries of Japan. But speaking to investors recently, Immelt said GE "wouldn't have started [the bid for Alstom] if we didn't think we could finish." Immelt's diplomatic negotiating skills, coupled with GE's large checkbook, proved too much for Siemens to overcome.
Following approval of the deal, Immelt expressed more confidence that he and his team, which employs more than 10,000 workers in France, had the expertise to extract value from the merger.
"I think we're confident that we can put up the right mechanisms and governance structures to be successful," Immelt said. He's proven he shouldn't be doubted.
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.
TheStreet Ratings team rates GENERAL ELECTRIC CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate GENERAL ELECTRIC CO (GE) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, increase in stock price during the past year and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GE's revenue growth has slightly outpaced the industry average of 0.6%. Since the same quarter one year prior, revenues slightly increased by 2.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has slightly increased to $4,961.00 million or 7.61% when compared to the same quarter last year. In addition, GENERAL ELECTRIC CO has also modestly surpassed the industry average cash flow growth rate of 3.59%.
- Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- GENERAL ELECTRIC CO's earnings per share declined by 17.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, GENERAL ELECTRIC CO increased its bottom line by earning $1.47 versus $1.38 in the prior year. This year, the market expects an improvement in earnings ($1.70 versus $1.47).
- The gross profit margin for GENERAL ELECTRIC CO is rather high; currently it is at 51.60%. Regardless of GE's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 8.82% trails the industry average.
- You can view the full analysis from the report here: GE Ratings Report