General Electric’s Hidden Gem – General Electric Company (NYSE:GE)

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General Electric (GE) is a company that is widely covered here on Seeking Alpha (“SA”) and, as you can expect, there are people with strong opinions on both sides of the aisle. It has, however, been very easy to be a bear over the past three years as the company’s stock price fell from the $30 range to under $15 per share.

ChartGE data by YCharts

Anyone that follows me on SA knows that I have been a GE bull for years, which unfortunately means that I have been wrong for years, but I still believe that there are reasons own this industrial conglomerate.

Another SA author, Mr. Victor Dergunov, recently posted “GE: Undervalued By About $53 Billion” and, of course, the author’s analysis/conclusion was criticized by the bears. While I do not agree with everything that Mr. Dergunov stated in his well-written article, I do believe that his overall takeaway was sound [i.e., GE still has some great (and valuable) businesses in its portfolio]. To this point, I will spend a few minutes covering a business that I believe is a real hidden gem, which is the Renewable Energy operating unit.

Playing The Long Game With Clean Energy – GE’s Hidden Gem

Aviation and Healthcare get all of the attention when it comes to GE’s operating units, and rightfully so, as both of these businesses have great growth profiles. But, let’s not overlook the Renewable Energy business.

Before going any further let’s touch on one topic that I am sure many bears will hang their hats on, which is the fact that our president, Mr. Donald J. Trump, has consistently touted coal as a viable long-term energy source. As such, some pundits do not believe that renewable energy has a place in the U.S. but I personally think that that train has long left the station. To this point, a recent article from Time notes that clean energy “grew at a record pace” in the U.S. and, again, outpaced new fossil fuel additions. Moreover, the same article references a report from Bloomberg New Energy Finance (“BNEF”) that notes that the declining cost of renewable energy (i.e., wind and solar) is making these new forms of energy a lot easier to adopt. So, I believe that we will have a place for “dirty energy” for at least the next few decades but, in my opinion, renewable energy is the future. And the numbers prove it.

Source: EIA.gov

Moreover, the EIA is projecting for substantial growth for renewable energy consumption over the next few decades.

Source: EIA’s Annual Energy Outlook

GE is also a major player in the natural gas industry so the Energy Consumption by fuel graph is a beautiful picture for this company.

For fiscal 2017, Renewable Energy only accounted for 9% and 5% of GE’s consolidated industrial revenue and profit, respectively, but the operating unit’s results were up double-digits when compared to the prior year.

Source: GE’s 2017 Earnings Press Release

This operating unit will not be enough to move the needle for GE in 2018 (or 2019) but, looking out, I believe that Renewable Energy will likely play a significant role in this storied company returning to its once great status. In my opinion, Renewable Energy’s growth profile is extremely promising and I fully anticipate for the operating unit to make up a more significant portion of GE’s earnings in the years ahead.

Nothing New, Another Bear Attack

J.P. Morgan’s Stephen Tusa recently lowered his price target for GE from $16 to $14 and sighted “cash flow challenges and a potential dilutive equity raise” as reasons why he believes that GE shares will likely face further downward pressure. As critical as I have been about Mr. Tusa’s non-stop bearish calls, it is important to note that the man has been flat out right about this company for the last year and half.

Source: TipRanks

So, let’s consider this. The biggest and most consistent GE bear (Mr. Tusa, of course) lowered his price target to $14, which represents only 5% downside risk based on today’s price, after what I would consider a “can’t get any worst than this” Q4 2017 earnings report that included the Power unit’s results falling off a cliff and the disclosure of an SEC investigation. Is a bottom finally in? I think so but I would take that with a grain of salt because I am also the one that thought a few months ago that GE shares would not trade down to the $14/share range. It is, however, hard to argue that GE shares are not attractively valued right now.

Valuation And My Dream GE

When compared to the company’s peer group, GE shares are trading at an attractive valuation based on current year analysts’ estimates.

ChartGE PE Ratio (Forward) data by YCharts

It is important to note that the broader market is also trading at lofty levels.

Source: multpl.com

Based on today’s valuation, I believe that the risk is currently to the upside for GE shares. As such, long-term investors should seriously consider holding onto their shares because I believe that the bad news is mostly baked into the stock price (of course, unless another shoe drops in next few quarters).

My Dream GE

GE is definitely contending with some significant headwinds (i.e., SEC investigations, Power struggles, cash flow concerns, pension shortfall, and the list goes on), but this industrial conglomerate still has some great businesses under its umbrella. Plus, the fact that the real shareholder value will be created over the next three-to-five years by splitting the conglomerate into more manageable separate companies is what has been lost in the discussion over whether or not it makes sense to break up GE. Therefore, I believe that Mr. John Flannery, CEO, should think beyond 2018 or 2019 and really decide what businesses make sense to be under one roof and separate off the companies that do not belong, even if “shareholder value” is not created by the specific transaction[s]. The real value will be created when the businesses are properly managed and capital is properly allocated across the product/service lines, which will obviously take time.

The transactions that I want Mr. Flannery to make over the next two years are the following:

  • Sell (or spin off) Transportation and Lighting
  • Spin off Baker Hughes, A GE Company (BHGE)
  • Spin off Healthcare – it pains me to say it but I believe that this business is more valuable as a standalone company, which is also the reason why I want the unit to be spun off instead of sold.

Hope is definitely not an investment strategy, but I believe that a GE focused on Power, Renewable Energy, and Aviation makes a ton of sense.

Risks

The main risk for investing in General Electric starts with management. There is no guarantee that Mr. Flannery is the right man to turn around a company that is widely viewed as a directionless, complex industrial conglomerate. Sentiment is the number one factor for GE shares being down by almost 50% in 2017, so shareholders are putting a lot of faith in a largely unproven leader, at least on this type of stage.

The SEC probe/investigation has the potential to be a game changer for this company. The fine is not the issue, but instead, what else the SEC will find is the real concern. Has GE been fudging its numbers for years? How exactly did the Power unit’s profit fall so far so fast? GE stock will face further downward pressure if the insurance charge probe results in the SEC looking deeper into the company’s past earnings results/disclosures.

Bottom Line

The Renewable Energy operating unit is not the reason to own GE shares but, in my opinion, it is a reason to stay long the stock. As I recently described, GE shares are not for everyone but there are legitimate reasons to own this industrial conglomerate. I do not believe that GE’s stock will be a market beater over the next 12-18 months but, in my opinion, there is a lot to like about the prospects for the company’s main businesses over the next few decades. Therefore, investors with a time horizon longer than two-to-three years should consider staying the course.

Full Disclosure: I recently sold a 1/3 of my GE shares held in the R.I.P. portfolio but I plan to build the position back up later in 2018. The SEC investigation into GE’s accounting practices is a significant risk and it was the main reason why I decided to reduce my stake in this company. The concern, in my opinion, is the SEC digging further into other areas of GE’s business and the damage that could have a lasting impact on investor sentiment. As such, I plan to monitor this development closely in the months ahead.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

If you found this article to be informative and would like to hear more about this company, or any other company that I analyze, please consider hitting the “Follow” button above

Disclosure: I am/we are long GE, BHGE, HON.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2018-02-14 10:44:27

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