Buy GE Stock Because 'Efforts to Revitalize GE Power' Will Pay Off -- Barrons.com
By Al Root
William Blair industrial analyst Nicholas Heymann thinks size matters.
In fact, he says investors should focus on small and medium-size industrial companies to produce market-beating returns. There is one exception to that strategy: General Electric (ticker: GE).
The back story. Heymann prefers small companies because they are less reliant on international sales that larger peers and the U.S. industrial market tends to offers better growth than foreign geographies. Less international exposure also means less impact from foreign-currency fluctuations.
Still, he thinks General Electric is the best-positioned diversified industrial megacap to outperform for the "next few years."
What's new. GE is slowly improving its balance sheet, adding much needed financial flexibility. The company is in the midst selling part of its health-care business to Danaher (DHR) for $21 billion.
Heymann has high hopes for the power division, too.
"While GE's recovery will be an extended process," Heymann wrote in a Friday research report, "internal efforts to revitalize GE Power may potentially benefit from an initial 2020 upturn for large gas turbines."
Of course, Heymann is one voice in the discordant GE choir. There are some notable bears worried about GE Power, such as Gordon Haskett analyst John Inch and JPMorgan analyst Stephen Tusa, who believe GE Power will face new challenges from potential Chinese competition by 2025.
Looking ahead. Heymann rates GE stock Outperform, the Blair equivalent of a Buy rating. His ratings don't usually include price targets, but he thinks the stock will hit $16 a share within a year and $19 a share by the end of 2020. That is a bold prediction -- $19 is 90% higher than recent levels.
For the small and medium-size strategy, Woodward (WWD) and RBC Bearings (ROLL) are 2 companies Heymann recommends. Woodward makes engine parts for planes and RBC is a leader in ceramic-coated bearings.
Sometimes small-capitalization stocks can look expensive. Woodward stock trades for 21 times estimated 2020 earnings and RBC shares trade for 28 times estimated 2020 earnings. The industrial components of the S&P 500, by contrast, trade for 15 times estimated 2020 earnings.
GE shares have returned 39% year to date, far better than the 16% return of the Dow Jones Industrial Average over the same span. But GE stock is down 25% over the past year, worse than the 9% gain of the Dow.