Friday, 17 July 2015

General Electric - solid execution and continued simplification still working out well

I last wrote on General Electric last year noting back then that the key to a potential value opportunity in this share was simplification so it was pleasing to see the headlines from today’s Q2 numbers are a small upgrade to industrial EPS and a slight enhancement to capital asset sale hopes:

Note as well the value of the Synchrony stake (part of the GE Capital spin-off).  This alone is equal to around 8% of the GE market cap…

So why the small upgrade?  Well orders were good (‘strong backlog and orders…winning versus competition’)…

…and pricing was marginally positive with ‘Services margins particularly strong’ (margins up 130bps).  Generally management observed that they are ‘running the company well’. 

To add some more detail simplification, productivity and pricing were positive whilst mix and base inflation were derogatory factors.  Nevertheless in combination a good underlying performance. 


Of course (negatively) the Oil & Gas division stood.  GE described the division’s performance as ‘impressive in a challenging environment’…and there is some truth in this with organic equipment sales being flat and overall operating margins up in a clearly very difficult operating environment. 


Previously I noted that: ‘Using the free cash flow indication a 5% yield at the top end of the range would suggest a target market cap of US$300bn (US$15% at 5%) which itself would imply at US$29.5-30 share price. 

That still remains my target so despite the big recent bump I retain a ‘buy’ on GE until nearer US$30/share price’

I would retain that view.  GE are going to try to add value through their portfolio actions and these initiatives continue at a time of solid (even adjusting for the difficulties for the oil and gas division) execution. 

With GE shares trading in the US$27s this means they remain a ‘buy’.


 

No comments:

Post a Comment