GE Hopes Transformation Brings Energy Back to Its Shares

NEW YORK (TheStreet) --General Electric (GE) keeps surprising investors in ways it hopes will build excitement and loyalty. Most recently it won the energy business of French engineering conglomerate Alstom, a deal that GE snatched from the jaws of its German competitor Siemens (SI).

But CEO Jeff Immelt is looking beyond that. He wants to make good on his plan to transform GE from a finance-focused labyrinth into a heavyweight of the industrial equipment universe. The Alstom transaction is just one component of that transformation.

By spinning off its credit card business, Synchrony Financial, via an initial public offering later this year GE lowers its dependence on profits from its finance division to a target of less than 25% by the beginning of 2016 from 45% in 2013.

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In addition, the company built a research center in San Ramon, Calif., just down the road from Silicon Valley. There it employs nearly 1,000 bright minds working on what GE has called its "industrial Internet," a host of software operating systems that connects physical machinery to a digital network.

With 5% of the company's revenue devoted to research and development, the new research facility is working furiously to fulfill GE's self-proclaimed ambition to become one of the world's 10 largest software firms. This is quite the departure from the old GE, which prided itself on being a hardware industrial provider only.

GE's Immelt recently said that rather than acquire its way into the software business it would build that business organically. So the company hired Bill Ruh from Cisco Systems (CSCO) and set off on the task of getting GE's software operations going strong.

The three-pronged areas of software development include: how to optimize the efficient performance of machines like GE's jet engines, predicting when a machine will need maintenance or repairs, and coordinating the performance of a complex system like a railway or an alternative energy grid.

Software systems that add even a small amount of operating efficiency and energy conservation will pay for themselves within a reasonable time period. Other money-savings benefits from state-of-the-art computer-based industrial programs are what customers around the globe are clamoring for.

Still, when it comes to the upward mobility of GE stock, investors need convincing evidence. Some of that will be provided when the company steps into the earnings confessional on July 18. Anticipate some encouraging guidance and further news of GE's progress to to return to its inventive, innovative roots.

As the one-year chart below colorfully illustrates, shares have been gradually stair-stepping higher after the stock price plunged at the beginning of 2014.

GE Chart
GE
data by YCharts

At around $27, shares are down nearly 5% for the year to date and need catalysts to recover. I'm anticipating a 3% increase in the company's second-quarter revenue and an 8% pop for earnings when GE reports Friday.

That may help, but to drive shares higher GE needs to announce an increase in its dividend. The current 88 cent annual dividend offers a yield of 3.2%, representing a payout ratio of 67%, so a small dividend boost can be done.

GE's charismatic CEO wants his company to reach levels of profitability and agility achieved by the best companies in the Silicon Valley. With its latest acquisitions and the progress of its "industrial Internet" its future looks as bright as one of its iconic 100-watt light bulbs.

At the time of publication the author has a position in GE.


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

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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 multiple strengths, 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 3.60%.
  • 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.

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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