The ongoing split up of General Electric Co. (GE, Financial) appears to be working wonders on the company’s prospects as it is currently outperforming the benchmark index.
After several years of languishing financial and market performances, in 2021, the Boston-based industrial conglomerate announced that in an effort to bolster its business, it planned to split into three publicly traded companies. They are GE HealthCare, GE Vernova and GE Aerospace. While the health care business was spun off in January of this year, the breakup is expected to wrap up in the first few months of 2024.
So far, the company’s efforts appear to be paying off. Not only did General Electric record strong results for the second quarter, but the stock has climbed around 65% year to date. This compares to the S&P 500 Index's gain of nearly 14% over the same period.
General Electric’s evolving business structure
Founded in 1892 by a group headed by famed inventor Thomas Edison, the company has seen a number of changes through periods of both turbulence and strength. Following the recent divestment of its health care segment, General Electric now consists of three businesses: aerospace, power and renewable energy.
The GE Vernova business, which is scheduled to be spun off early next year, is a global energy company that encompasses the conglomerate’s current power, wind and electrification segments. Only the aerospace division, which is its largest unit by revenue, will remain under the original company’s umbrella, focusing on manufacturing aircraft engines, systems and avionics.
Earnings review
General Electric reported its second-quarter financial results on July 25.
For the three months ended June 30, the company posted earnings of 68 cents per share on $16.7 billion in revenue. Both figures were up from the prior-year quarter. Further, GE recorded its fifth consecutive quarter of accelerating growth over the year-ago periods.
Net income came in at $35 million, which was a significant improvement from the $882 million loss it saw last year.
In a statement, Chairman and CEO H. Lawrence Culp Jr. noted the company’s performance was built off of the strong momentum seen in its first quarter. He attributed the double-digit increase in orders and revenue to “robust services growth across our portfolio, increased demand at GE Aerospace and record Renewable Energy orders.”
"GE Aerospace is growing rapidly, executing on the ramp for customers and building services strength, while GE Vernova advances toward its spin-off as Renewable Energy improves and Power continues to deliver,” he said. “Each business has its own critical mission and focus.”
Looking ahead, General Electric raised its guidance for the year. It now anticipates low double-digit revenue growth, adjusted earnings per share of between $2.10 and $2.30 and free cash flow of $4.10 billion to $4.60 billion.
Dividend
On Sept. 6, General Electric’s board of directors authorized a quarterly dividend of 8 cents per share. It will be distributed on Oct. 25 to shareholders of record as of Sept. 26.
While the company lost its status as a Dividend Aristocrat in 2009, it currently has a dividend yield of 0.29% and a payout ratio of 0.03.
Valuation
General Electric has a $118.74 billion market cap; its shares were trading around $109.10 on Monday with a price-earnings ratio of 13.57, a price-book ratio of 3.81 and a price-sales ratio of 1.67.
The GF Value Line suggests the stock is significantly overvalued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
At 57 out of 100, the GF Score indicates the company has poor performance potential. While General Electric received moderate ratings for profitability, financial strength and momentum, the growth and value ranks are low.
General Electric also has a predictability rank of one out of five stars. According to GuruFocus research companies with this rank return an average of 1.10% annually over a 10-year period.
Guru interest
While gurus have been more bearish toward the stock in recent quarters, there are still several who appear to be betting on General Electric going forward as it carries out its transformation.
Of the gurus invested in the stock, Dodge & Cox has the largest stake with 2.24% of its outstanding shares. Andreas Halvorsen (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Hotchkis & Wiley, Nelson Peltz (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have significant positions. However, only one of these investors added to their holdings in the most recent quarter, while the rest either cut back or left it unchanged.
During the second quarter, Jeremy Grantham (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jefferies Group (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) entered new investments in the stock.
Final thoughts
While it may still be too early to tell whether or not General Electric’s business transformation will work out for all involved, it appears to be on the right track so far with strong earnings results and a stock performance that is topping the benchmark index.
As such, investors may want to take a closer look at the industrial giant.
