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Expect GE to Beat the Market Over Next Two Years: CIO

The industrial and financial giant General Electric beat the street on earnings by one cent on Friday, and the near-term future performance looks equally bright for the company, says Jack De Gan, Harbor Advisory's chief investment officer.

General Electric building in Ohio
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General Electric building in Ohio

“I think this year will be exciting for GE, because this year and next, earnings should compound around 13 percent, which is double what the S&P [500 index]is expected to do,” said De Gan. “And when you add in a dividend that’s close to double the S&P’s, you ought to have a good relative return.”

Chief executive of GE, Jeff Immelt, has stated his intention to increase the dividendthis year and next, commensurate with earnings.

“If we get 12 to 13 percent earnings growth, and the same with a dividend at the end of next year, it’ll be 25 percent higher than where it is now," De Gan projected.

This 12 to 13 percent earnings growth is De Gan’s projection based on Friday’s results, whose highlights included industrial revenue growth of 14 percent, and 11 percent organic revenue growth, which, in other words is increased output and sales generated within the company, excluding any mergers or acquisitions.

“I’m focused more on 11 percent on organic revenue growth; that’s the real story about the strength of the underlying business,” said De Gan.

On Friday, the company reported increased profits from its transportation, health care, and energy infrastructure businesses in the quarter — it is the latter that sparked De Gan’s interest.

“They’ve been buying oil and gas valves, pipes, and undersea equipment. They’ve identified oil and gas, as well as health care and water as three of the major initiatives going forward. I think those are well thought-out, and good to pursue long-term,” he added.

And yet, with all this good news, it may take a bit longer to re-fuel the stock price, which has essentially flatlined around $20 since 2009.

“It’s a stock that has left a bad taste in people’s mouth. You’ve had 10 or 12 years of multiple compression,” he said. “People still remember this stock at $60. It’s been one of our poorest long-term core holdings.”

De Gan cares more about the future than the past, however. He’s predicting about a 4.5 percent annualized return if dividends increase with equity.

“GE really does, especially over the next two years, look like a relative opportunity,” he said.

Additional News: GE Earnings, Revenue Top Estimates

Additional Views: Moody’s Downgrades GE, Citing GE Capital Risks

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Disclosures:

Jack De Gan does not personally own shares of GE. Harbor Advisory clients own shares of General Electric.

Disclaimer

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Follow Jennifer Leigh Parker on Twitter @jparker741.