Is General Electric Company (GE) A Sell?

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General Electric Company (NYSE:GE)‘s stock price surged a whopping 140% in the last 2 years! That in itself is huge news for investors. Congrats to the people who bought in at the right time, but the real question is where the price is heading from here.

If you are curious what the analysts have to say, let us look at the table below. While most analysts out there tout General Electric Company (NYSE:GE) as a strong buy, earnings are expected to strengthen going forward.

Company -5.30% +9.60% +10.30% +9.70% 14.10
Industry 0.00% +4.30% +18.00% +10.20% 14.90
S&P 500 +3.20% +5.80% +5.50% NA 15.30

In the last five years, earnings have actually gone down while the S&P 500 index has gone up. In the next couple of years, the earnings growth rate will likely make up for that (or, that is what the analysts expect).

To verify the analysts’ recommendation, let us dig deeper into the company financials.

Qualitative Analysis

Let us look at the last five years’ EPS summary below. It is good to see that EPS has shown continuous growth in the last five years, which means that the company is doing well when it comes to the bottom line.

12/12 147.36 billion 17.41 billion 10.96 billion 14.68 billion 1.39
12/11 147.29 billion 20.26 billion 10.93 billion 14.23 billion 1.24
12/10 149.57 billion 14.19 billion 11.54 billion 12.61 billion 1.15
12/09 154.44 billion 9.86 billion 12.70 billion 10.81 billion 0.99

General Electric Company (NYSE:GE)However, the problem is that the net margin always closely depends and should follow the graph of both the gross margin and EBITDA margin. If you are not making enough money from just selling your products and services, you cannot sustain your bottom line. If you are not efficient in your operations, you cannot sustain your bottom line. And that seems to be the case with General Electric Company (NYSE:GE) at the moment. Take a look at the graph below.

And this is in contrast with the increasing capex being incurred by the company. When the focus is more on the energy and aviation side, it is natural that the company has to incur capex regularly. But the effect on the profitability margins has not been satisfactory to be honest.

GE’s long-term debt has gone down over the last couple of years, resulting in a decrease in the interest expense nonetheless. And the strain on the working capital has been cushioned with higher retained earnings since 2010. But the question is whether the high capex ratio, with tightened capital availability and declining margins, will not negatively affect shareholder’s equity. In other words, we need to see a better asset utilization factor, not to bother about the high capital expenditures and falling debt.

In addition to that, the tax rate is expected to rise sharply in the next couple of years. That might put additional burden on the bottom line as well.

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