By Lewis Krauskopf
NEW YORK (Reuters) - General Electric Co (N:GE) shares are trading at their highest valuation in more than a decade, reversing discounts to other industrial rivals and adding pressure on the U.S. conglomerate to show it can drive profits in line with its newfound market premium. After a big run this year, GE shares sit at 20 times forward 12-months earnings projections, their highest level since 2005, according to Thomson Reuters data. GE, the sixth-biggest U.S. company by market value, gets a chance to prove the shares are worthy of their price tag at its annual investor outlook meeting on Wednesday.
"There is an expectation that GE, after years of not growing well, will now grow better than many of its peers," said Scott Lawson, vice president of investment management firm Westwood Holdings Group. "The question is: Will the expectation be fulfilled?"
GE's share price ignited in April, when the company announced it would shed $200 billion worth of its GE Capital assets to become a more sharply focused industrial goods manufacturer. This excited many investors who long believed GE's finance exposure weighed on its valuation. The stock gained fresh momentum after activist investor Nelson Peltz's Trian Fund Management unveiled a $2.5 billion stake in GE in early October.
Flush with proceeds from the GE Capital sales, the company plans to return $90 billion to shareholders through share buybacks and dividends. Investors are counting on the divestments to allow GE to shed a U.S. regulatory designation it was tagged with in the wake of the credit crisis, while it reaps cost savings and other benefits from its recently completed $10 billion purchase of the power equipment business of France's Alstom (PA:ALSO).
GE's several-year transition to a more pure industrial manufacturer is why some analysts are using earnings estimates as far out as 2018 to value the stock.
Analysts on average project GE to increase earnings per share by 16 percent next year, while earnings for S&P 500 companies overall are expected to rise by 8.2 percent, according to Thomson Reuters data. GE is expected to boost earnings per share by 19.5 percent in 2017 and another 13.5 percent in 2018, although fewer analysts are surveyed for those projections.
Ten analysts tracked by Thomson Reuters rate the stock a "buy" or "strong buy", while seven rate it a "hold." For the year, GE shares have climbed about 19 percent, while the S&P 500 index (SPX) has slipped 2 percent and the Industrial Select Sector ETF (P:XLI) has fallen 7 percent.
Based on price-to-earnings estimates, GE shares are trading at their biggest premium to the S&P industrials sector <.SPLRCI> since around the start of 2002, just after current chief executive Jeff Immelt took over as CEO. Against the broader S&P 500, the stock in recent weeks has been trading at its steepest premium in more than five years.
Before the April announcement, GE's P/E ratio trailed many industrial rivals such as Honeywell International (N:HON) and United Technologies (N:UTX). As of Friday's close, GE's forward P/E ratio was well above Honeywell's 15.1 and United Tech's 14.2, while also topping those of manufacturers 3M Co (N:MMM) and Germany's Siemens (DE:SIEGn).
GE has become a "cleaner story" as it divests most of the finance business, said Keith Davis, an analyst at investment firm Farr, Miller & Washington, but the stock's rise gives him pause.
"I might be more inclined to look at it if it has given back some of the recent gains it has had," Davis said.