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General Electric: Shares Could Witness Upside On December Catalysts

 December 05, 2012 05:02 PM

(By Mani) Shares of General Electric Co. (NYSE: GE) could witness a relatively attractive period in the next few weeks as there are multiple events that could boost sentiment toward the shares comprising a potential dividend hike and two investor meetings, including the annual year-end analyst meeting with CEO Jeff Immelt on Dec 17.

Since GE's shares peaked on Oct.5 at just over $23, the stock has traded off nearly 10 percent, significantly under-performing peers, due to concerns over GE's ability to meet 2012/13 margin targets.

The company's margins in the third quarter of 2012 missed expectations. GE is targeting 100 basis points (bps) of industrial margin improvement through 2013 (30-50bps in 2012; 50-70bps in 2013).

[Related -General Electric Company (GE) Q4 Earnings Preview: Feeling The January Effect]

In addition, investor angst toward high-dividend paying stocks such as GE in advance of the fiscal cliff also brought down the shares.

At the Board of Directors meeting in early December, the Board may authorize an increase in GE's dividend. GE Power & Water analyst meeting in Greenville, South Carolina on December, 12 provides an opportunity for GE to highlight global power opportunities and counter-balance Siemens power meetings on December, 11.

Moreover, the year-end meeting on December, 12 is likely to provide investors with a more detailed road map toward GE's future margin expansion targets.

"We believe investors could become increasingly interested in GE as a relatively defensive industrial play – the November ISM reading below 50 suggests continued sluggish industrial demand conditions could persist near term," Deutsche Bank analyst John Inch wrote in a note to clients.

[Related -General Electric Company (GE): GE Shares At An Inflection Point]

Notably, December has historically been a month of out-performance for GE's shares. Over the last 20 years, GE shares have averaged a 4 percent plus monthly return in December, well above the less than 1 percent average monthly return for the rest of the year and superior to other multi-industry companies.

"Over the last several months, we believe GE has been used as a source of funds for other industrial names that had been underperforming relative to GE; recall GE shares had a strong run between June and October 2012 – up >25%," Inch said.

In addition, GE's fundamentals and relatively defensive profile should better position the company versus peers over the next several months.

The vast majority of GE's industrial businesses are long/late cycle in nature. In turn, GE's sales and earnings trajectory are not as cyclical as many other industrial companies whose fortunes are tied to business conditions in the short term appear to be potentially getting worse.

'While not all of GE's industrial businesses are firing on all cylinders, GE's overall organic growth and EPS growth next year should still exceed peers, on average. We expect GE's EPS to expand at least double-digits next year – better than the <10% EPS growth we expect for our coverage universe (excluding outliers CFX and SPX)," Inch noted.

As a result, these event catalysts, coupled with GE's relative under-performance recently, could drive relative out-performance catch-up of GE's shares through year-end.



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