Is the GE Stock Price Really Set to Double?

General Electric (NYSE: GE) shares popped 5% Monday on news that Nelson Peltz has invested $2.5 billion in the company. CNBC’s resident stock market expositor Jim Cramer was so enthused by Peltz’s investment he speculated the GE stock price could double.
Peltz’s investment is worth noting, to be sure. His GE stake is now the largest holding in his hedge fund, Trian Fund Management. What’s more, Peltz’s reputation is that of an activist. Like Carl Icahn and Bill Ackman, Peltz takes meaningful stakes in underperforming companies and then agitates for change to his liking.
Peltz’s GE stake appears unlikely to foment any hostility, though. Peltz would simply like to see GE continue to cut costs, raise operating margins and increase leverage to fund share repurchases beyond current guidance.
I initially recommended GE shares to High Yield Wealth readers last October. Upon hearing of Peltz’s investment, my initial reaction was the mental equivalent of a shoulder shrug – big deal. GE doesn’t really need Peltz’s input; operations have been on the upswing for some time.
When I recommended GE shares, the company was already actively transforming itself. It had just sold its small appliance division to Electrolux for $3.3 billion. A year earlier, it had sold its media division, NBCUniversal, to Comcast (NASDAQ: CMCSA) for $18 billion.
At the same time, GE was retreating from financial services. GE Capital had shrunk to $452 billion in net investments – nearly 18% below the $550 billion in net investments it held when the financial crisis hit in 2008. The portfolio shrunk further after it spun off its consumer-credit business Synchrony Financial (NYSE: SYF).
GE Capital continues to shrink to this day. Earlier this week, it announced a deal with Global Jet Capital – an aircraft leasing company – to sell its corporate aircraft financing unit for $2.5 billion. By 2016, GE expects to reap 75% of its earnings from its industrial businesses. This means GE’s primary focus will be aviation, oil and gas, and power generation by the end of the decade.
In short, GE had been transforming itself long before the Peltz stake was revealed.
Today, GE is well positioned to improve its efficiency and operating margins in its industrial segments. The process should be aided by two primary longer-term trends: credit market improvement and improving global demand in longer-cycle infrastructure businesses, such as power generation, energy management and exploration, and jet engines.
So, are we looking at a doubling of GE’s share price?
Eventually, but it won’t occur next month, or even next year. GE is a huge conglomerate. Nothing happens in a hurry, and that includes share-price appreciation. That said, as long as GE continues to cut costs and expand margins – which have been trending higher this year – then shareholders will be rewarded with a higher share price.
In the meantime, the Trian investment has put a floor under GE’s share price. Downside risk has been significantly reduced. This means that income investors should feel more comfortable availing themselves of GE’s dividend with its 3.4% yield. (For a smorgasbord of stable high-yielders that will pay you fat monthly checks all year long, click here.)
GE shareholders are unlikely to see a $50 share price this time next year, but a $35 share price is certainly within the realm of possibilities if operational efficiency continues along its current trajectory.