Why GE Could Gain Over 20% in 2016

Argus also points out GE’s strong new order trends. The growing backlog of booked business was a positive, as was the continued divesting of GE Capital. Argus said:

The plan to divest most of GE Capital will now place additional focus on the Industrial businesses, and management expects to invest $10 billion to $15 billion annually in industrial growth initiatives. We see the higher margin backlog, solid execution in the industrial businesses, and a smaller GE Capital that provides financing for the company’s industrial customers, as strong positives for General Electric, and believe that GE stock remains attractively priced based on a range of valuation metrics.

Argus does acknowledge the disappointment in the failed sale of GE Appliances for $3.3 billion to Electrolux. The company said that the 2015 Industrial operating earnings will come in at the low end of its forecast range of $1.13 to $1.20 in EPS. Still, GE Capital’s retained verticals are expected to add $0.15 in EPS.

Another boost is expected to be a massive share buyback and strong dividend in 2016. The GE board has authorized the repurchase of up to $50 billion in common stock, and it is expected to cut its share count to 8.5 billion or less by 2018. GE has indicated that it plans to maintain its dividend at the current level in 2016 and grow it thereafter.

On the valuation front, Argus thinks that GE shares are attractively valued at the current price (near $30). While this is at the high-end of a 52-week and multiyear range, GE’s stock chart is in a bullish pattern of higher highs and higher lows that dates back to August 2015. GE is valued at 19.3 times projected 2016 earnings. While that is above the midpoint of the five-year range, it is actually in line with the peer average.

On a price-to-sales basis, GE’s shares are now trading below the peer group average, according to the Argus analysis. GE’s dividend yield of about 3.0% is also above the midpoint of its five-year range and remains above the average dividend for peers.

GE shares were last seen trading up 0.5% at $30.64 on Wednesday. Even on Friday’s pop, the Argus price target of $36.00 implies 17.5% upside, and then the 3.0% dividend yield takes the implied total return over 20%.

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