By Sarfaraz A. Khan. Research Assistant: Gohar Yousuf
NEW YORK (TheStreet) -- Technology and infrastructure giant General Electric (GE_) began the year by focusing on growth of its industrial business and improvement in margins. GE, the world's leading jet engine and medical scanner maker, is now moving forward with its plan to reduce its reliance on the financial sector. For 2014, GE is targeting up to a 5% increase in sales, while its industrial division could contribute up to 70% of profits. With cost cutting measures and top-line growth, the business will consistently improve its profitability through 2016.
Over the next couple of years, GE is looking for significant growth in international markets, driven by China and other regions rich in natural resources. The company's takeover strategy will fuel its inorganic growth. Meanwhile, General Electric will continue rewarding shareholders through dividends and buybacks. The business also gives an attractive yield of 3.20%, which is twice as big as the industry's average.
I am staying bullish on General Electric. The business's stock dropped by nearly 2% recently, to $27.48 at market close on Friday, on slightly negative news. I believe this makes General Electric a strong buy.
GE could enter 2014 on a high note. The business is expecting to report strong performance in the fourth quarter of 2013. It has better organic growth, plus a margin expansion of 70 basis points from its Industrial segment. Over the past year, the company has poured investment into its Industrial segment. This will cause double-digit year-over-year bottom-line growth from its Industrial unit to be reported for the second half of 2013.
In 2014, the Industrial unit will report around 4% to 7% organic growth, which should offset the decline coming from GE Capital. As a result, in 2014, GE could report between 0% to 5% overall growth in sales.
The business has consistently grown the margins of its Industrial unit since 2011. This trend will likely continue through 2014. For 2013, the operating margin of the Industrial unit climbed to 15.8% from 15.1% in 2012 and 14.8% in 2011.
When 2013 results are tallied, GE will have cut more than $1.5 billion in costs. They will follow this with another $1 billion reduction in 2014.
Overall, through cost cutting and margin expansion measures, GE will push its manufacturing margins to 17% by 2016.
Power and Water and Transportation Segments
General Electric's Power and Water segment has struggled in the past due to a drop in demand for power turbines. The company is expecting a turnaround in 2014, despite challenging market conditions in the developed world, due to an uptick in power turbine demand. This follows a shift in demand to the developing markets. The continued cost-cutting initiatives in this segment will also improve the unit's profitability.
On other hand, GE will witness a decline in revenues from its Transportation segment because ofweakness in the North American coal market. The persistent softness in the mining industry will continue to hurt this segment.
This is also evident in the performance of other players in the mining industry. For example,Caterpillar (CAT_) is also struggling due to a significant drop in demand. In 2013, Caterpillar reported three reductions in its annual guidance. The business has recently reported a 12% decline in retail sales for November, after 12% and 9% drops in October and September respectively. With persistent weakness in the Resource Industries segment, Caterpillar is now betting on its Power Systems unit for a turnaround.
For the next several years, GE is quite optimistic about its growth prospects in Mexico and China. However, it will have a tough time in some other markets, like India and Brazil, where it already had a difficult year.
In China, the company will continue to grow its orders from $6 billion in 2012 to nearly $8 billion in 2013. Moreover, the business will find significant growth opportunities via China's 5-year plan. As a result, the revenues from GE's Aviation, Power and Water, Healthcare and Oil and Gas segments in China could double by 2020.
The company has also identified several resource-rich regions, ranging from Africa to Canada to Saudi Arabia, which will add around $50 billion to GE's order book by 2015. That is significant growth from less than $10 billion in 2001.
Despite large divestitures, GE will continue to grow due to acquisitions. In the last three to four years, the company has sold around $24 billion in assets, including the recent $500 million sale of GE Healthcare's Vital Signs unit to CareFusion (CFN_). Offsetting these sales are several acquisitions in the same period, worth $23 billion in total. Moreover, the business will spend between $1 billion and $4 billion on acquisitions in the coming years.
Dividends and Buybacks
In 2013, GE returned $18 billion to shareholders through dividend and buybacks. The company will go for a small increase in its payout ratio in 2014.
The firm has recently increased its quarterly dividend by 16% to $0.22 per share. In the last three quarters of the current fiscal year, the company has paid $5.8 billion in dividends to investors, representing a payout ratio of more than 59%. By 2015, GE will buy back more than half a billion shares.
Essentially, General Electric's shareholders, through dividends and buybacks, will continue to enjoy healthy returns.