Comment
0
Tweet
0
Print
RSS Feeds

The Best Is Yet To Come

Saturday - 4/27/2013, 4:00pm  ET

General Electric stock plunged around 4% since the announcement of its first quarter 2013 earnings. The quarter earnings increased by around 16% and were above the Street's expectations by a slight margin. Also, the operating EPS rose by 15% to $0.39, as compared to the analysts' estimate of $0.34. Despite this, the stock reacted adversely to the news, due to the dull profit outlook emerging from a weaker Europe. This affected the company's overall industrial profit margin. The margin reported in this quarter was 12.9%, down from 13.7% in the same quarter, a year ago. The overall revenue from the region decreased around 17% on yearly basis. Even though GE was expecting gloomy results from this region, I feel this was certainly worse than expected and hurt investors' sentiments.

On the positive front, the company's revenue increased slightly to $35 billion, led by robust sales of aviation and home equipment. This helped the company to surpass the analysts' expectation of $34.51 billion. GE's order backlogs, which determine the future stream of profits, remain solid. The company's equipment order increased by 10%, driven by 47% increase in aviation orders and 24% increase in oil and gas orders. The total backlog for orders stood at $216 billion, which is up from $210 billion at the beginning of 2013. The backlog for GE has consistently grown over the last few quarters, showing strong demand among its customers. This is also favorable for the company's future prospects, as it gives an assurance about the future revenue generation.

Let's discuss some of the recent happenings in the company, which will drive its future earnings capacity.

The acquisition

Recently, GE announced its acquisition of Lufkin Industries  for more than $3 billion. With this acquisition, GE aims at developing its oil and gas segment with Lufkin's experience in artificial lift technology. Lufkin's technology is used in 94% of the oil wells in production worldwide, and that market is still expanding. It forms an integral part of the oil and gas industry, and the sector is expected to reach $13 billion in 2013. I believe this acquisition is a perfect fit in GE's product portfolio, and will broaden its market presence in the oil and gas equipment segment. This segment has grown rapidly at an annual rate of 16% in the last three years, mainly supported by strong acquisitions. Moreover, it is the fastest growing business for GE and the company will capitalize this growing opportunity via this deal. I expect that after this acquisition, this trend will continue in the future, as this advanced product portfolio will help GE to grow, overcoming any minor headwinds.

On the other hand, Lufkin's stock is already trading up by around 50% in the last three months, with almost 40% of gain occurring in pre-market trade after the acquisition announcement. This clearly shows that the company's shareholders are satisfied with the deal. The deal from GE offers around 38% premium to Lufkin's shareholders and they will receive $88.80 in cash per share. The deal is expected to close in the second half of 2013.

The transformation

GE is currently in a transformation phase, wherein it is focusing more on the industrial segment along with reducing its dependency on other businesses. Under this process, the company announced its decision to sell the remaining 49% of stake in NBC Universal to Comcast  in the first quarter. Comcast paid around $16 billion for this, which was earlier expected to happen in 2014. After this deal, Comcast now completely owns NBC Universal. I see this deal as a win-win situation for both companies. Via this acquisition, Comcast will enjoy more benefits from the rapidly growing prices of TV programs and sports rights. This deal brought a multi-billion dollar business opportunity to Comcast that includes cable networks, broadcasting and much more. It would bring good organic growth to the company, boosting the operating earnings in the future.

GE will get enough cash from this deal to support its future buyback plans. The company is planning to return around $18 billion to its investors in 2013. This includes $10 billion of buyback, along with the dividend hikes. The company increased its quarterly dividend rate by around 20% to 19.5 cents, pushing the total annual payout to $0.78. Moreover, now with the strong cash balance, I feel GE can invest more into its industrial business, similar to its Lufkin acquisition.

Conclusion

GE has the capacity to tap various growth potential areas throughout different industries. The company seems to be on the right track with its acquisition and divestment strategies. Even though the European business is witnessing some major headwinds due to the macro-economic condition, I feel the company's overall strategies will overcome such challenges. The stock's journey has been quite volatile in the last year, with just over 12% return. I expect the above two discussed factors will provide much needed support to the stock's price in the future. And, not to forget, GE has given attractive returns via dividend and share buybacks. I recommend a "buy" for GE and see this as a safe bet for a long-term investment.

   1 2  -  Next page  >>