Why GE could gain over 20% in 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

Gen­eral Elec­tric Co. has by far been the best con­glom­er­ate of 2015. 24/7 Wall St. just ran a com­pa­ra­ble anal­y­sis on all the large con­glom­er­ates to see which one would be the best op­por­tu­nity in con­glom­er­ates for 2016. And while its views were very pre­lim­i­nary, Ar­gus is look­ing for a solid 2016 for Gen­eral Elec­tric.

Last Wed­nes­day’s an­a­lyst up­grades and down­grades showed that Ar­gus has re­it­er­ated its Buy rat­ing in GE shares. What stood out here is that GE’s price tar­get at the firm was raised to $36 from $34 in the call. GE closed at $30.49, so if you in­clude its div­i­dend yield, this would im­ply more than 20% in up­side in 2016.

Ar­gus now has among the high­est an­a­lyst price tar­gets on Wall Street. Just re­cently, the high­est tar­get was $35. Thom­son Reuters now shows the high­est an­a­lyst tar­get be­ing $38, but the con­sen­sus an­a­lyst price tar­get is still only $31.77.

Ar­gus noted that the GE’s 2016 out­look and up­dated 2015 guidance was a pos­i­tive. CEO Jeff Im­melt and team now see mid­teens earn­ings per share (EPS) growth based on 2% to 4% or­ganic rev­enue growth in 2016. Im­melt said that he again expects “slow growth” and a “volatile world” to take place in 2016. GE set its 2016 earn­ings guidance at $1.45 to $1.55 per share, which was up 11% to 19% from the Ar­gus 2015 es­ti­mate.

Ar­gus sees lead­er­ship in GE com­ing from in­te­grat­ing the Al­stom power and grid busi­nesses (adding five cents in 2016 EPS and $0.20 EPS in 2018), re­new­able en­ergy and in health care oper­a­tions. Oil and gas and trans­porta­tion are ex­pected to be lag­gards, and for­eign cur­rency is ex­pected to have a neg­a­tive im­pact of $0.02 per share next year. Ar­gus said: “We ex­pect a pick-up in EPS next year based on cur­rent re­struc­tur­ing ef­forts, the Al­stom ac­qui­si­tion, and share buy­backs. Our 2015 EPS forecast is $1.30 and our 2016 (EPS) forecast is $1.55.

Now that the re­struc­tur­ing of GE Cap­i­tal is es­sen­tially com­plete, the com­pany plans to ap­ply to reg­u­la­tors to deregister as a Sys­tem­i­cally Im­por­tant Fi­nan­cial Institution. As­sum­ing the fil­ing is ap­proved, man­age­ment will likely take out ad­di­tional debt to buy back stock.”

Ar­gus also pointed out GE’s strong new or­der trends. The grow­ing back­log of booked busi­ness was a pos­i­tive, as was the con­tin­ued di­vest­ing of GE Cap­i­tal. Ar­gus said: “The plan to di­vest most of GE Cap­i­tal will now place ad­di­tional fo­cus on the In­dus­trial busi­nesses, and man­age­ment expects to in­vest $10-15 bln an­nu­ally in in­dus­trial growth ini­tia­tives. We see the higher mar­gin back­log, solid ex­e­cu­tion in the in­dus­trial busi­nesses, and a smaller GE Cap­i­tal that pro­vides fi­nanc­ing for the com­pany’s in­dus­trial cus­tomers, as strong pos­i­tives for Gen­eral Elec­tric, and be­lieve that GE stock re­mains at­trac­tively priced based on a range of val­u­a­tion met­rics.”

Ar­gus does ac­knowl­edge the dis­ap­point­ment in the failed sale of GE Ap­pli­ances for $3.3 bln to Elec­trolux. The com­pany said that the 2015 In­dus­trial op­er­at­ing earn­ings will come in at the low end of its forecast range of $1.13 to $1.20 in EPS. Still, GE Cap­i­tal’s re­tained ver­ti­cals are ex­pected to add $0.15 in EPS.

An­other boost is ex­pected to be a mas­sive share buy­back and strong div­i­dend in 2016. The GE board has au­tho­rised the re­pur­chase of up to $50 bln in com­mon stock, and it is ex­pected to cut its share count to 8.5 bln or less by 2018. GE has in­di­cated that it plans to main­tain its div­i­dend at the cur­rent level in 2016 and grow it there­after.

On the val­u­a­tion front, Ar­gus thinks that GE shares are at­trac­tively val­ued at the cur­rent price (near $30). While this is at the high-end of a 52-week and mul­ti­year range, GE’s stock chart is in a bullish pat­tern of higher highs and higher lows that dates back to Au­gust 2015. GE is val­ued at 19.3 times pro­jected 2016 earn­ings. While that is above the mid­point of the five-year range, it is ac­tu­ally in line with the peer av­er­age.

On a price-to-sales ba­sis, GE’s shares are now trad­ing be­low the peer group av­er­age, ac­cord­ing to the Ar­gus anal­y­sis. GE’s div­i­dend yield of about 3.0% is also above the mid­point of its five-year range and re­mains above the av­er­age div­i­dend for peers.

GE shares were last seen trad­ing up 0.5% at $30.64 last Wed­nes­day. The Ar­gus price tar­get of $36.00 im­plies 17.5% up­side, and then the 3.0% div­i­dend yield takes the im­plied to­tal re­turn over 20%.

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