Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

General Electric May Be A Pick For The Right Portfolio

Published 10/27/2022, 04:22 AM
Updated 09/29/2021, 03:25 AM
  • A day after a mixed earnings report, General Electric stock is moving higher.
  • This seems to be a mostly good report that outweighs some headline bad news in its renewable energy business.
  • The company is on track to split off into three distinct businesses starting with GE Healthcare in early 2023.
  • GE stock may be a fit in the right portfolio.

Writing about a stock on the day it posts earnings can sometimes cause you to walk some statements back. But that's not the case as I look at General Electric Company (NYSE:GE). If I had written about the company on Oct. 25, the day it posted a solid but not spectacular earnings report, my thought would have been the same. I think the stock may be a buy, but only in the right portfolio.

The difference is that investors appear to be viewing the stock much differently. On the day of the earnings report, GE stock didn’t do much. But the day after is a different story. GE stock is up nearly 5%. Some of that may be due to the bullish sentiment that seems to be gaining steam.

Investors may also become more familiar with what the earnings report shows for the industrial conglomerate. Yesterday, the news was about the company’s losses in its renewable energy business, specifically wind turbines.

Earnings Dropped Sharply

So what did the earnings report reveal? The headline numbers showed top-line revenue of $19.08 billion. That was better than analysts' forecast. It was also better than the prior quarter and the same quarter in the prior year. Unfortunately, the same can’t be said of earnings. The 35 cents per share was below the consensus estimate as well as the prior quarter and the prior year’s quarter.

However, this may be a case of a company preparing investors for the worst and then coming in better than expected. General Electric had warned that supply chain problems would influence earnings. However, the company announced its renewable segment's $1.3 billion restructuring plan. And chief executive officer, Larry Culp, told analysts he still expects the company’s high-growth offshore wind business to be profitable by the middle of this decade.

Growth in Services

But the company did post growth in its Aerospace division. And a significant amount of this growth came from Services. Revenue in this area was up 33% from the prior quarter. Since this business tends to have higher margins and is more sticky, investors are rethinking their outlook for the stock.

Analysts seem to be as well. After sentiment on GE stock soured over the summer, the initial response to the earnings report is favorable. Three analysts have increased their price target on the stock. And the one that lowered its target still forecasts an upside of over 15% from the stock’s $76.25 price as of this writing.

A Split for the Better

Since taking the helm of GE, Culp's mission was to streamline the business. Initially, this meant shrinking the company’s finance unit. And starting in 2023, the company will see its three current business units be separated into three individual companies. GE Healthcare is on track to be the first of the spin-offs, with the move expected to happen early next year.

The bullish narrative is a reverse “sum of its parts” argument. The thinking is that each company may receive a higher valuation from analysts. This will be because each company should be nimbler than they are as part of a conglomerate. This means that investors could exchange their GE shares for shares of the new companies and have the chance for better returns.

The Right Stock for the Right Portfolio

The idea is that you can buy GE stock today for a lower valuation than the three individual companies would have combined. But the larger question is where it would fit into a portfolio.

It hasn’t been an income story for a long time. And it’s unclear whether any new companies will be in a financial position to consider offering dividends. And as a growth story, it seems there may be other stocks that you can look at in the Industrials space with a cleaner balance sheet.

And the spin-offs occur when the economy is in a recession and investors are still avoiding risk-on assets. That’s a lot of unknowns for me. But that’s why I say GE may be a good fit in the right portfolio.

Original Post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.