Why GE Could Generate Gains of Over 15% in the Next Year

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General Electric Co. (NYSE: GE) is a leading blue-chip industrial company that some analysts believe is poised to generate high single-digit earnings growth over the next five years. One independent research firm in particular, Argus, believes that GE will continue to benefit from its restructuring to focus on its Industrial Group, as well as from its diverse product lines and its strong presence in the power generation, aviation and health care markets.

The firm sees the growing 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 GE.

As a result, Argus has a Buy rating for GE with a $36 price target, implying upside of 13% from the current price level.

Based on the recent margin trends, as well as an expected uptick in sales from the spike in the backlog, the firm maintained its 2016 forecast of $1.55 in earnings per share (EPS), which is at the top of management’s guidance range. Argus expects the pickup in earnings this year also to be based on current restructuring efforts, the Alstom acquisition and share buybacks. The firm is also maintaining its 2017 EPS forecast of $1.75 in EPS, based on expectations for continued margin expansion and a recovery in the oil and gas business. The five-year earnings growth rate forecast is 6%.

The consensus estimates from Thomson Reuters call for EPS of $1.51 and $1.74 in 2016 and 2017, respectively.

In the report, Argus detailed GE’s position in the energy market:

Given current energy market volatility, we are closely watching GE’s energy businesses this year. In the second quarter, Oil & Gas revenues fell 22% on a reported basis to $3.3 billion, and organic orders for equipment declined 34%. CEO Immelt has noted on conference calls that 2016 will be even more challenging for the Oil & Gas business than management had expected, and is planning to lower costs by $400 million in response; in 2015, management cut $600 million in costs. Even so, during the second quarter, the segment profit margin plummeted 500 basis points as cost-out actions were more than offset by volume decline. On the brighter side, core orders for Renewable Energy rose 14% in the second quarter, driven by higher wind turbine shipments.

Looking forward, the company plans to maintain its dividend at the current level in 2016 and grow it thereafter. In January 2015, GE raised its annualized dividend by 5% to $0.92, for a yield of about 3.0%. The firm’s dividend estimates are $0.92 for 2016 and $0.98 for 2017.

Shares of GE traded down more than 1% at $31.63 Monday morning, with a consensus analyst price target of $33.36 and a 52-week trading range of $19.37 to $33.00.