Is General Electric Company (GE) Destined for Greatness?

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Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let’s take a look at what  Company (NYSE:GE)‘s recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you’re about to see tell GE’s story, and we’ll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company’s become more efficient over time. Since profits may not always be reported at a steady rate, we’ll also look at how much GE’s free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If GE’s share price has kept pace with its earnings growth, that’s another good sign that its stock can move higher.

Is GE managing its resources well? A company’s return on equity should be improving, and its debt-to-equity ratio declining, if it’s to earn our approval.

Healthy dividends are always welcome, so we’ll also make sure that GE’s dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let’s take a look at GE’s key statistics:

GE Total Return Price Chart

Source: GE Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% (4.6%) Fail
Improving profit margin 35.7% Pass
Free cash flow growth > Net income growth (100%) vs. 27.2% Fail
Improving EPS 27.7% Pass
Stock growth (+ 15%) < EPS growth 64% vs. 27.7% Fail

Source: YCharts. * Period begins at end of Q4 2009.

GE Return on Equity Chart

Source: GE Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 22% Pass
Declining debt to equity (13.4%) Pass
Dividend growth > 25% 90% Pass
Free cash flow payout ratio < 50% 33.3% Pass

Source: YCharts. * Period begins at the end of Q4 2009.

How we got here and where we’re going
GE started off with a thud thanks to declining revenue and free cash flow, but strong equity-based metrics and a sustainably growing dividend bring the industrial giant back to a respectable six out of nine passing grades. That free cash flow drop is a bit worrisome, as is GE’s stock price outpacing its earnings per share. What’s on the horizon for GE that might improve its score for next time?

Based on its latest earnings report, things appear to be moving in the right direction, albeit very slowly. Revenue is barely growing ahead of inflation, and margins are expanding at anemically slow levels. The brightest spot continues to be its energy divisions, particularly renewable energy. As the largest wind-turbine manufacturer in the country, GE is well-positioned to take advantage of continuing interest in the sector — particularly now that the wind-energy tax credit has been extended through 2014. GE has been also bolstering its wind-energy efforts with an investment in a number of French wind farms.

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