We Think the Market Is Wrong About GE

Complex and noisy financials with a revenue decline are not the typical setup for growing optimism in a stock call. However, in GE's GE case, we think our optimism is warranted. While the stock declined on the trading day, we think GE's long-term fundamentals are improving. We raise our fair value estimate to $133 from $131 due to time value of money, and we expect the stock to rise meaningfully over the long term. That said, we expect to further re-evaluate our assessment as the company issues its 10-K, particularly as we await certain account disclosures with the move to one-column reporting following the sale of GECAS. GE's stock now trades at a 32% discount to our fair value estimate, which we think is an attractive entry point for investors with a two- to three-year outlook. Aside from the deal limbo baked into shares as investors await the spins of combined power and renewables (energy) and healthcare, we think weaker-than-expected revenue could have factored into the decline in shares during the trading day. Revenue fell below both analyst consensus expectations, and our own ($74.2 billion full-year actuals versus $75.3 billion, full-year expected). However, we think the market's assessment is myopic. Our primary rationale is both GE's strong order and backlog growth, which portend stronger long-term sales growth than the market appreciates. Mission-critical industrials like GE have large installed bases and strong switching costs that provide years of higher-margin aftermarket revenue, a privilege of GE's economic moat. Said differently, despite the difficult operating environment, which affects revenue negatively in the short term, we think strong demand will translate into future sales. That's because backlogs in long-cycled businesses like aerospace are traditionally strong and orders don't tend to just disappear.

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