Although the company closed 2016 with anemic sales, we think shares look fully valued.
Shares of wide-moat General Electric
look fully valued relative to our $30 per share fair value estimate, as the company closed the books on 2016 with rather anemic fourth-quarter results. Excluding Alstom, industrial segment revenue declined by 1% year over year, reflecting ongoing weakness in the oil and gas and transportation segments, which each reported double-digit declines in organic revenue growth. However, when including Alstom’s revenue starting in November 2015, GE's industrial organic sales increased 4%.
Barbara Noverini is a senior equity analyst for Morningstar.
In our view, Alstom's strong contribution bodes well for the burgeoning growth story in GE's power segment, which continues to see strong orders in both gas turbines and power services. With Alstom, GE Power grew revenue organically by an impressive 15% year over year. In addition, GE's renewables, healthcare, energy connections, and aviation segments all reported strong organic sales gains.
GE’s legacy industrial segment operating profit margins (excluding Alstom and corporate costs) expanded 10 basis points to 19.4% in the fourth quarter. Gross margins fell about 10 basis points, as unfavorable mix more than offset pricing gains and cost productivity. That said, additional progress in GE’s SG&A simplification efforts contributed to the industrial segment margin expansion. Higher year-over-year corporate costs caused legacy industrial margins to decline 100 basis points to 17.3%. On a positive note, management indicated that Alstom synergy achievement is ahead of plan, with efforts contributing approximately 100 basis points of margin expansion in the quarter.
For the first time in two years, GE’s oil and gas segment reported positive order growth, led by turbomachinery equipment. In our view, the continuation of this positive trend, combined with strong order growth in power, aviation, renewables, and healthcare, makes low- to mid-single-digit organic revenue growth and approximately 10% growth in earnings look reasonable for 2017.
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