Should the New-Look, Focused GE Be in Your Portfolio Now? - Analyst Blog

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On Apr 14, Zacks Investment Research upgraded industrial goods manufacturer General Electric CompanyGE to a Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell) primarily on the back of a massive restructuring program orchestrated by its Chairman and CEO Jeff Immelt. General Electric shares are currently trading at a forward P/E of 16.0x with long-term earnings growth expectation of 8.0%, which reflects its inherent growth potential.

Why the Upgrade?

In order to create a simpler and nimbler company with a re-focus on core operations, General Electric is undergoing a massive restructuring in its operating portfolio. The latest and arguably the most audacious restructuring initiatives are part of a series of strategic actions undertaken by General Electric.

In accordance with Immelt's vision to transform the company to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months. The only financial operations that would be retained by the company will include the financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.

Immelt's current restructuring plan also involves the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at year-end 2014. The CEO felt that this was perhaps the most opportune time to sell these assets when the market was relatively high. The decision might also have been triggered by the Federal Reserve's decision to raise interest rates later this year, thereby pushing up the financing costs.

The transactions will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.

The company will record $16 billion of after-tax charges in the first quarter of 2015 in connection with the plan, $12 billion of which are non cash. General Electric expects that the adverse impact of the divestments would be nullified by share buybacks over the exit period. Management has authorized a new share repurchase program worth $50 billion to execute this strategy, reducing its outstanding share count to 8-8.5 billion by 2018. About $35 billion will be made available through dividend payments of GE Capital to its parent company. General Electric is likely to return over $90 billion to shareholders through dividends and share buybacks through 2018.

Other Stocks to Consider

Other stocks that look promising in the industry and are worth a look include Compass Diversified Holdings CODI , Icahn Enterprises, L.P. IEP and Carlisle Companies Incorporated CSL , each carrying a Zacks Rank #2 (Buy).

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GENL ELECTRIC (GE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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