Writing about a stock the day it earns earnings can sometimes cause you to backtrack on some statements. But that’s not the case when I look at General Electric (NYSE:GE). If I had written about the company on October 25, the day it posted a solid but unspectacular earnings report, my thoughts would have been the same. I think the stock could be a buy, but only in the right portfolio.
The difference is that investors seem to view stocks very differently. On the day of the earnings report, GE stock wasn’t doing much. But the next day is a different story. GE shares are up nearly 5%. Some of that could be due to the general bullish sentiment that seems to be gaining momentum.
Investors may also become more familiar with what the earnings report shows for the industrial conglomerate. Yesterday, the news centered on the company’s losses in its renewable energy business, particularly wind turbines.
Income has fallen sharply
So what did the revenue report to reveal? The headlines showed sales of $19.08 billion. That was better than analysts’ forecast. It was also better than the previous quarter and the same quarter in the previous year. Unfortunately, the same cannot be said of earnings. The 35 cents a share was lower than the consensus estimate, as was the prior quarter and the prior year quarter.
However, this could be a case of a company preparing investors for the worst and then outperforming expected. General Electric had warned that supply chain problems would affect profits. However, the company announced a $1.3 billion restructuring plan in its renewable segment. And chief executive officer, Larry Culp, told analysts he still expects the company’s burgeoning offshore wind business to be profitable by the middle of this decade.
Growth in services
But the company did see growth in its Aerospace division. And a significant portion of this growth came from Services. Sales in this area were 33% higher than in the previous quarter. Since this company generally has higher margins and is stickier, investors are rethinking their outlook for the stock.
Analysts seem to be too. After sentiment on GE stocks soured in summer, the initial reaction to the earnings report is favourable. Three analysts have raised their price target for the stock. And the one that lowered its target is still forecasting a gain of more than 15% from the stock’s $76.25 price at the time of writing.
A split for the better
One of Culp’s missions since he took over from GE has been to streamline the company. Initially, this meant a downsizing of the company’s financial unit. And from 2023, the company will split its three current business units into: three individual companies. GE Healthcare is on track to be the first of the spin-offs and the move is expected to happen early next year.
The bullish story is an inverted “sum of its parts” argument. The thinking is that each individual company can receive a higher rating from analysts. This is because any business needs to be more agile than they are as part of a conglomerate. This means investors can trade their GE shares for shares of the new companies and stand a chance of better returns.
The right stocks for the right portfolio
The idea is that today you can buy GE stock at a lower valuation than the three separate companies would have combined. But the bigger question for me is where would it fit into a portfolio.
It is no longer an income story. And it’s unclear if any of the new companies will be in a financial position to consider offering dividends. And as a growth story, it seems there are other stocks to look at in the Industrials sector that have a cleaner balance sheet.
And the spin-offs are happening at a time when the economy is in recession and investors are still avoiding risky assets. That’s a lot of unknowns to me. But that’s why I say, in the right portfolio, GE could be a good match.