New, Improved GE Comes at a Price

General Electric reported decent third-quarter results Friday, boosting its shares. ENLARGE
General Electric reported decent third-quarter results Friday, boosting its shares. Photo: sebastien bozon/Agence France-Presse/Getty Images

Investors have vindicated General Electric GE 3.39 % ’s strategic shift. Now management needs to return the favor.

GE reported decent third-quarter results Friday, sending its shares higher. Industrial revenue of $ 27.9 billion slightly missed analyst expectations, while earnings of 29 cents a share topped estimates. The latter was due partly to a 1% improvement in profit margins from a year earlier.

GE has handily outperformed the Dow Jones Industrial Average this year, driven by the ongoing transformation of its core business to focus on the industrial business while shedding its capital arm. And the stock is up 14% in the two weeks since activist manager Trian Fund Management announced it bought $ 2.5 billion of shares.

With the stock’s outperformance comes higher expectations. GE shares now fetch 19 times forward earnings, according to FactSet. Honeywell HON -1.49 % and United Technologies UTX -0.19 % fetch 16 and 14 times, respectively. GE’s multiple may appear slightly inflated as earnings have to absorb transformation costs for at least the next year or so.

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Still, to maintain a premium, GE needs to show its more-focused effort will lead to strong earnings growth. That is a concern for investors, considering GE’s order backlog for equipment is flat from a year earlier. And new orders fell 43%.

While the result suggests a shaky macroeconomic environment, GE said it expects a significant improvement in the fourth quarter.

GE’s core business should be relatively well insulated from a temporary lull. Orders for service contracts, which account for about three-quarters of earnings, increased 2% from a year earlier.

And management is reflecting economic uncertainty in its assumptions. Finance chief Jeff Bornstein said Friday the company expects double-digit earnings-per-share growth “for sure” in 2016, despite a dour economic backdrop.

GE surely will need to do so to justify the valuation reward investors have given it.

Write to Charley Grant at [email protected]


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