General Electric Company (GE) Looks Good For Shareholders in Long Run

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General Electric Company (NYSE:GE) shares are the hot topic currently. That is because several analysts and investors started viewing the stock with long term potential. How has the change of opinion happened all of a sudden? As far as the company is concerned, it has been well on course of divesting non-core assets to focus on its strong points rather than bleed with the troubled units. However, the most important of them all is that the company is coming out of the Central Bank’s SIFI regulations. That is primarily because of the systematic divestments of its financial divisions because of which it will lose its position as a financial institution. Instead, it would become a pure-play industrial powerhouse. The company has its presence in a number of sectors like the energy or the aviation or the industrial products to drive its future growth. Let’s look at how the company is placed to take advantage.

Exit From Banking System Is Complete

General Electric Company (NYSE:GE) indicated recently that it closed the sale of its online deposits to Goldman Sachs Group Inc (NYSE:GS) for $16 billion. As a result, its presence in the financial segment has been completely withdrawn. That will also remove the company from the clutches of Federal Reserve’s Systemically Important Financial Institution (SIFI), which is an instrumental process. GE Capital CEO, Keith Sherin, expressed his view that the sale ensured that the company could fully exit the banking system in the United States by extinguishing its American Bank charter. That apart, the company is hopeful of terminating its FDIC insurance in the next few days. That enables the company to get more money at its disposal.

The news from General Electric Company (NYSE:GE) has boosted the sentiments among analysts. For instance, Action Alerts Plus analyst, Jack Mohr, said that the exit from the banking system emboldened his bullish thesis as it comes on the predicated belief that the stock has enough room for further multiple expansion to reflect its industrial earnings growth. Aside from that, shedding of capital assets should also help expand its multiples. The more cash from the disposal of assets meant there is more cash available for disposal to its shareholders. Therefore, investors and analysts expect the industrial conglomerate to return more cash to its shareholders. Alternatively, a part of the divested sum could be used towards acquisition also.

Buyout Opportunities

It is quite obvious that General Electric Company (NYSE:GE) prefer to strengthen the areas where it has already its presence. For instance, in the energy sector, which included power also, it has a significant presence. The company is sitting in an enviable position as it can afford to pick and choose at its will in the current atmosphere. Most recently, the company was engaged with Halliburton Company (NYSE:HAL) to acquire some of the latter’s assets of oil fields, which was reportedly valued more than $7 billion. However, there were problems in reaching an agreement on the pricing resulting in another bidder entering the fray. Whatever the outcome might have been, one thing was certain. That is the company was seriously scouting for some value buying opportunities.

As far as General Electric Company (NYSE:GE) is concerned, the power sector remains positive for spending outlook though some risks continued to remain. The demand loads dictate the amount of spending to be made by the businesses. For that purpose, the Northern American Electric Reliability Corporation (NERC), provided a general picture of its long-term reliability assessment, which is a moderate outlook for spending in the next five-year period. There was also a rider, albeit positive. The agency believes that the conditions could also improve in the medium-term. That meant the outlook was positive on the whole for the power sector. The agency’s findings also suggested several signals favoring spending on capacity. That is a good sign for the company to invest.

Well-Placed Currently

Currently, General Electric Company (NYSE:GE) is well-placed in the most important sector since power services accounted for 63% of power revenue last year. For example, the company acquired the energy assets of Alstom, which is a good tactical move. It might have raised eyebrows among some investors. However, it would add considerable installed base in a slow-growing market. The company’s installed base grew 50% after the Alstom integration. As a result, the business conglomerate is bound to get a number of additional service opportunities. That means the company could earn 5 – 8 cents a share in the current year. By 2018, it has the potential to earn anything between 15 and 20 cents a share.

Also, General Electric Company (NYSE:GE)’s new H-Class turbine is contributing to strong order growth. That was because of its improved efficiency characteristics. As a result, the company has also been gaining market share in the bigger turbine market. Also, focusing on creating Industrial Internet of Things solution would provide some opportunities for growth in its power services. It will also gain from the low gas prices as it could run more gas turbines. The lower gas price is a big boon for the company because of its big installed bases. Also, the company’s transformation towards other competing energy sources like Coal could ensure an accelerated speed due to attractive gas price. Also, the government’s regulation against coal should enable it to look for gas as a source of generating power.

Conclusion

Different analysts have started putting their price targets above $35 with a long-term perspective. There is no doubt that long-term prospects are good for General Electric Company (NYSE:GE) and the exit of the financial segment is a blessing in disguise. However, as Jim Cramer said that it is better to buy the shares at pull back. That is because some acquisitions will provide a better picture.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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