General Electric Company (GE): Why This Stock Could Be a Smart Investment

Over the past few years, General Electric Company (NYSE:GE) has posted robust growth in several business divisions. The company expects to report a strong performance this year as well, especially in the healthcare division. Sales from this division have grown at a CAGR of 4.5% over the last three years. Going forward, based on GE’s strong focus on research and innovation, I expect the company to continue reporting consistent growth. Below is a snapshot of GE’s Q1, 2013 results.

Revenue was below expectations and the earnings growth was relatively low in various industrial divisions, particularly in Power & Water. The Power & Water division, which includes wind power, declined heavily due to a noticeable drop in demand for installations of wind turbines. Of late, the sluggish wind power capacity in China, coupled with slump in natural gas prices in the U.S., has affected the inflow of investments in the wind power sector on a worldwide scale.

However, earnings from other industrial divisions increased 6%, as robust growth was reported in the transportation, healthcare, and aviation segments. GE Capital posted 9% growth in profit during the quarter, in addition, orders for the company also grew by 10%.

The rapidly growing demand for aircraft engines and oil and gas equipment is likely to push GE Capital’s backlog to a sky rocketing $216 billion.

Noticeable trends in key segments

The Power & Water segment witnessed a massive decline of 26% in sales. A considerable drop in demand for wind turbines globally, particularly in Europe, contributed to the decline in sales. Within the U.S, recoiling natural gas prices resulted in a low demand for wind turbines, hence, it poses a huge threat to potential investment inflow for wind farms.

Other segments, which include Aviation, Transportation, Healthcare, and Oil & Gas, reported  moderate numbers. Within the Aviation and Oil &Gas segments, orders grew 47% and 24%, respectively. The increase in orders is predominantly underpinned by a rapid increase in demand for new aircrafts from airlines. This also led to higher shipment volumes for airplane engines that are developed by General Electric Company (NYSE:GE).

In the Oil & Gas sector, where GE supplies drilling equipment, growth was reported on the back of rising global demand for Oil & Gas. The increase in demand is a result of higher energy consumption from emerging markets such as China, India, and Brazil. It is noteworthy that the decline in the Power& Water segment was made up by growth in other industrial divisions.

Competitive landscape

General Electric Company (NYSE:GE)’s Aviation competes directly with United Technologies Corporation (NYSE:UTX)‘s Pratt and Whitney Aircraft Engines. United Technologies Corporation (NYSE:UTX) generates the highest percentage of its revenue through UTC Climate, Controls & Safety at around 29%. This is followed by Pratt and Whitney Aircraft Engines and Otis Elevators at around 24% and 20%, respectively. The remaining revenue is generated through UTC Aerospace systems and Sikorsky Helicopters.

The Pratt and Whitney Aircraft division has a fairly positive outlook, as the company’s R&D is renowned for working towards developing ground breaking aviation engines. Presently, the company develops F-135 engines for the U.S. Air force; in addition, it is also developing liquid fuel J-2X engines to facilitate NASA’s future plans of space exploration. Going forward, I expect the company to charge a premium on its products resulting in higher EBITDA margins. I believe with strong fundamentals and growing demand for its products, United Technologies Corporation (NYSE:UTX) is a solid investment option.

Within the Healthcare division, General Electric Company (NYSE:GE) competes with Abbott Laboratories (NYSE:ABT). Abbot generates the highest percentage of its revenue through Pharmaceuticals, at around 62%. This is followed by Nutritional and Diagnostics, at around 18% and 12%, respectively. During fiscal 2012, Abbott Laboratories (NYSE:ABT) operated on an EBITDA margin of 44%, however, the diagnostic segment operated on an EBITDA margin of 36%.

According to the valuation offered by Trefis, the diagnostics segment, which competes with GE Healthcare, accounts for 14% of Abbott’s stock price. Going forward, I expect Abbott to benefit hugely from its growing presence in emerging markets such as India, China, and Brazil. Additionally, acquisition of companies such as Starlims Technologies and Ibis Bio sciences will enable it to enhance its presence in a niche space such as molecular diagnostics.

NBCU transaction and future outlook

General Electric Company (NYSE:GE) gained a healthy sum of $18 billion through the sale of its remaining share in NBC Universal. After the sale of its 49% stake, it earned $0.08 per share. It is noteworthy that the cash generated through this transaction will be distributed among shareholders in the form of dividends and share buy backs. During the first quarter, General Electric Company (NYSE:GE) distributed approximately $4 billion through dividends and share repurchases.

Additionally, the company plans to use the surplus cash to initiate operational restructuring for margin expansion. Through various cost cutting initiatives, such as shutting down several high cost yielding plants and reducing the employee count, the company was already successful in cutting down its industrial cost by $200 million during the first quarter of 2013. Moving ahead, the company expects the industrial cost cutting initiative to yield $1 billion in savings by the end of this year.

GE Aviation presently holds a 27% market share in the global aviation industry. With constant innovation that has led to GE Aviation offering more fuel efficient engines, I expect its footprint to grow further in the aviation industry. However, increase in the aviation business will largely depend on the global growth of the aviation industry.

The healthcare division, which includes medical devices and equipment  currently possesses a market share of 6.7%. General Electric is a pioneer in the medical equipment industry with exceptional commitment to innovation through R&D. Emerging economies such as India and China present a huge growth opportunity for the company. The penetration level of healthcare products is extremely low in the emerging markets and thus, I expect the company to increase its global healthcare market share by launching radically innovative products and push its market share to 10% in the future.

I believe the stock has the potential to appreciate going forward, and investors should consider holding GE in their portfolio.

The article Are Tesla and Google Teaming Up? originally appeared on Fool.com.