A year ago, Jeff Immelt told investors at an industry conference there was a "mismatch" between the performance of company he led, General Electric Co, and its stock price. Immelt, whose departure as chief executive was announced last June, proved prescient but perhaps not in the way he was thinking: GE shares have declined 45 percent since that conference and hit a nearly nine-year low in March.
On Wednesday, Immelt's successor as chief executive of the industrial conglomerate, John Flannery, will make the case for GE's investment potential at the same annual Electrical Products Group investor conference in Longboat Key, Florida. Flannery will have some momentum. The stock price has climbed 20 percent since early April, and GE on Monday clinched a deal to spin off its transportation unit.
But, at around $15.50 a share, the stock is still well in the red for 2018, down 11 percent. GE shares are trading at lower valuations than those of other diverse manufacturers, with GE at 15.4 times forward earnings estimates, compared with 17.3 times for United Technologies Corp and 18 times for Honeywell International Inc, according Thomson Reuters Datastream.
"If the company were healthy, the valuation would be very attractive," said Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Illinois. "But to my eye, there needs to be some more evidence to emerge before I would step in." GE's recent share bounce appear to stem from a few factors, according to Jairam Nathan, an analyst at Daiwa Capital Markets America.
The recent surge in oil prices stands to benefit GE's oil and gas equipment and services business, which includes exposure through its Baker Hughes oilfield services company. GE also maintained its 2018 profit guidance in its first quarter report on April 20, encouraging investors who also may have been comforted by progress in Flannery's plan to divest $20 billion in assets as part of an overhaul, Nathan said.
It announced a $11.1 billion deal on Monday to merge its transportation business with US rail equipment manufacturer Wabtec Corp, with GE and its shareholders owning just over half of the combined business. The deal involving the transportation unit, while a small portion of GE overall, "is what we think investors want," said Morningstar analyst Keith Schoonmaker. "Namely, they want a simpler, more manageable conglomerate with healthier liquidity."
After rising 1.9 percent on Monday, GE shares were up another 1 percent on Tuesday. But a number of issues continued to cloud the outlook for the stock, including the health of GE's massive power-generation unit, whose profit tumbled last year, and uncertainty about any lingering liabilities at the company including with its GE Capital finance arm.
GE took a $6.2 billion fourth-quarter charge for reevaluation of insurance assets, and sources said on Tuesday that the company is working with investment bankers to find ways to shed its insurance business. Investors are also focused on whether GE can generate enough cash flow to cover obligations, including its dividend, which the company cut in half in November.
GE'S dividend yield of 3.15 percent ranks it ninth among the 30 Dow industrial components. "The current dividend payout ratio remains too high for the company to de-leverage over time simply from running its business," JPMorgan analyst Stephen Tusa said in a research note on Tuesday. Tusa, a longtime bear on the stock, rates it "underweight" with a $11 price target.
However, William Blair analyst Nick Heymann, who rates the stock "outperform," said he believes the dividend "remains secure" and that the transportation deal "could be a critical catalyst that shifts investor psychology about GE to a value rather than a contrarian investment." "Instead of how low GE's shares might decline, investors are likely to now focus on how long it might take for GE's shares to rebound," Heymann said in a research note on Tuesday.
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