GE's Mixed Quarter Was Never Meant to Be a Needle Mover

 | Apr 22, 2016 | 12:30 PM EDT
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--This commentary was originally sent to subscribers of Action Alerts PLUS at 11:11 a.m. ET on Apr. 22, 2016. Click here to learn about this dynamic market information service for active traders.

 

This morning, General Electric (GE) reported an in-line quarter against depressed expectations. Core earnings of $0.21 per share (a rise of 5% over the previous year) came in $0.02 ahead of consensus, and revenue increased 6.4% to $27.6 billion, slightly below consensus of $27.95 billion.

Importantly, management reaffirmed full-year 2016 guidance for EPS, organic revenue growth, cash flow and capital returns. All in, we believe Action Alerts PLUS holding GE delivered the mixed quarter that investors expected. Although uninspiring, it was never meant to be a needle mover.

Our investment thesis -- which remains intact -- is predicated on GE's outsized buyback program (with $18 billion in buybacks planned for this year), ongoing portfolio transformation (streamlined, simpler, more efficient and productive), a peer-leading dividend yield (over 3% vs. peer average of 1.6%), accretion from the Alstom buy and a continued upward multiple re-rating -- with the shedding of GE Capital.

The quarter served as a dividing line between segments: Better-than- expected results in Aviation, Healthcare and Renewable Energy were offset by disappointing results in Oil & Gas, Transportation and Power. Although organic growth (which declined 1%) was discouraging, backlog increased 18%.

Crucially, management reiterated its 2016 guidance framework, including EPS of $1.45 to $1.55 and organic revenue growth of 2% to 4%. The company also reiterated forecasts for free cash flow ($29 billion to $32 billion for the year), around $0.05 in accretion from its Alstom acquisition and FX headwinds of around $0.02.

The sale of the company's Appliances business -- set to close in the second quarter -- is still expected to benefit EPS by $0.20, and GE is expecting to redirect the savings towards restructuring costs. On segment-level guidance, management expects incremental downside in Oil & Gas to be offset by upside in Aviation, Healthcare, Renewable Energy and Power.

In terms of capital returns, GE returned $8.3 billion to shareholders in the first quarter -- $6.1 billion through buybacks. For the full year, management anticipates $26 billion in capital returns (including the $18 billion in buybacks mentioned above).

We appreciate the company's simpler, stronger and more streamlined portfolio, with its GE Capital exit "ahead of plan" -- $166 billion in deals signed and $146 billion closed. Management also commented on its recent request for the removal of its SIFI (Systemically Important Financial Institution) designation, and expects to get a response from regulators in the next few weeks. Considering the company has all but exited its financial arm, we see no reason why regulators would even attempt to block the request.

Bottom line: We knew this quarter was devoid of upside catalysts, but we believe in the positives: the company's robust free- cash-flow generation, strong backlog, aggressive capital-return program and room for further multiple expansion as the company's industrial earnings rise and capital assets are shed -- two developments which are all but completed.

We reiterate our $35 price target and would be buyers under $30 a share.

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