General Electric Company (GE) is oh-so-close to fully exiting the financial business, and analysts will be as keen as ever to hear about how business is faring at GE’s industrial units when it reports earnings Friday.
If last quarter’s earnings are any guide, GE’s results will be mixed, as continued weakness in segments that sell goods and services to the energy sector offset continued strength in power turbines, aviation and transportation. Emerging markets — we’re looking at you, China and Brazil — should also be a drag.
In other words, it seems unlikely that General Electric will surprise Wall Street to the downside when it comes to earnings per share. Indeed, GE beat Street estimates for the last three consecutive quarters. So as long as organic growth keeps chugging along, General Electric stock should be fine.
For the most recent three-month period, analysts on average expect General Electric to post EPS of 19 cents a share, according to a survey by Thomson Reuters. That’s down from 20 cents a year ago, when it had not yet committed to getting out of the financial business.
General Electric did miss the Street’s revenue forecast last time around, but the market hasn’t been punishing companies much for doing so. Partly that’s attributable to the negative effect on revenue caused by a stronger dollar.
For the latest quarter, analysts are looking for revenue of $27.78 billion vs. $29.36 billion a year ago.
GE Stock Needs a Catalyst
The best thing the earnings report could do would be to give investors increased confidence in GE’s growth prospects. Some analysts think that as a defensive stock, GE is fully valued, especially if investors start favoring growth bets over value.
And, indeed, GE is getting toward the top of what constitutes an attractive valuation. Shares are trading at more than 17 times forward earnings on a long-term growth forecast of 12.5% per annum. That’s a better value than the broader market, which goes for 18.5 times forward profits on growth rate of a little more than 5% a year.
It’s also the case that GE stock isn’t exactly an outlier in the industrials sector. The broader group has a price-to-earnings multiple of 15.7, but industrial conglomerates cost almost 20 times forward earnings.
And although GE stock trades at a premium to its own five-year average, that’s partly because the financials business dragged down the multiple all those years. After all, the financials sector trades at just 13 times forward earnings. Money center banks go for even less than that.
Still, a defensive stock closing in on 18 times forward earnings in a slow-growth macroeconomic environment is right to give new money pause. That could make it tough for GE stock to get any love from multiple expansion.
For the year-to-date, GE stock is essentially flat (the broader market is up 2.7%).
All things being equal, GE probably needs to up its forecast, dividend or buyback program to get shares to market-beater levels. There’s no indication that’s in store for tomorrow, but it would be just what the stock needs.
The bottom line is that GE hasn’t looked this good in years and it’s not yet overpriced.
If you’re patient enough to wait for the macro cycle to turn, GE should prove to be a bargain.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
