Options Trade – General Electric Company (NYSE:GE) Calls   
Tuesday, January 14, 2014

Growth Through Diversification!

**OPTIONS TRADE: Buy the GE Apr 2014 29.000 call (GE140419C00029000) at or under $0.21, good for the day. Place a protective stop limit at $0.08 and a pre-determined sell at $0.40.

by Ian Harvey

January 14, 2014

Introduction

General Electric Company (NYSE: GE), a diversified technology and financial-services company, is one of the most important companies to report this week – Friday 14th January, 2014. It's expected to report FY 2013 fourth-quarter EPS of 49 cents on revenue of $40.22 billion, compared with a profit of 38 cents a share on revenue of $39.33 billion in the year-ago period. Over the past 12 months, the stock has gained 30.1 percent.

There are many macroeconomic factors to consider for GE, as well as company specific issues. Most Wall Street strategists are forecasting higher price targets for the S&P 500 and the Dow, and the rising tide should lift most ships, including GE. The Federal Reserve is tapering its bond buying, and the hope is that the rise in interest rates will not be high enough to derail the recovery. The world markets outside of the United States are also exiting their recessionary trends, and U.S. gross domestic product is expected to tick up.

However, Oppenheimer recently downgraded the stock to perform calling 2014-2015 a transitional period for the company.

On the other hand, S&P Capital IQ has a buy rating on the company, stating:

“We see GE as well positioned for growth supplying high technology products and services critical for economic development across the globe. We see results as aided by two primary longer-term trends: credit market improvement and improving global demand in longer-cycle infrastructure businesses such as power generation, energy management, and exploration and jet engines as global growth trends pick up.”

Last year, GE continued to benefit from its impressive global presence in important industries and its very strategic new investment strategy. The company is clearly not going to be left behind by the new age as it actively seeks out and makes use of new technology to revolutionize industry. The stock's 2013 performance also reflects GE's cyclical nature as illustrated by its beta coefficient of 1.18. The economy really started to find traction through the year, and GE benefited as a result, along with other industrials like Boeing (BA) for instance, which was up by an adjusted 85%.

Company Details

General Electric Company (GE) is a diversified technology and financial services company. The products and services of the Company range from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing and industrial products. It serves customers in more than 100 countries.

In June 2013, American Realty Capital Trust IV Inc announced that it has closed on the acquisition of 377 primarily net lease retail properties as part of its previously announced portfolio acquisition from certain affiliates of General Electric Co's GE Capital.

In August 2013, General Electric Company completed the acquisition of the aviation business of Ario S.p.A. In December 2013, CLARCOR Inc. completed the acquisition of Air Filtration business of General Electric Company’s Power & Water division.

Effective December 31, 2013, CareFusion Corp acquired Vital Signs Inc from GE Healthcare, a unit of General Electric Co.

Key Statistics for GE

Current P/E Ratio (ttm) 16.9452
Estimated P/E(12/2013) 16.3286
Relative P/E vs. SPX 0.9877
Earnings Per Share (USD) (ttm) 1.5774
Est. EPS (USD) (12/2013) 1.6370
Est. PEG Ratio 1.7653
Market Cap (M USD) 270,437.27
Shares Outstanding (M) 10,117.37
30 Day Average Volume 33,923,300
Price/Book (mrq) 2.2042
Price/Sale (ttm) 1.9369
Dividend Indicated Gross Yield 3.29%
Cash Dividend (USD) 0.2200
Dividend Ex-Date 12/19/2013
5 Year Dividend Growth -8.62%
Next Earnings Announcement 01/17/2014

Earnings

Looking at the financials of the third quarter, the company made revenues of $10.6 billion as opposed to last year revenue in the third quarter of $11.2 billion. That shows a decrease of 5%. The operating expenses, however, decreased by 7% from $9.5 billion to $8.8 billion. This 2% difference adds to the company's efficiency. Furthermore, the provisions for income tax decreased from $80 million to $1 million, loss of discontinued operations also decreased by $20 million giving the company a far better net profit margin. This is how the company increased its net income despite the falling revenues which is a very good indicator of the company's improving efficiency.

As the quantitative easing process is at its end, it is likely that the Federal Reserve will increase interest rates, which will enhance the revenues of General Electric Capital.

Major points of consideration are as follows:

• General Electric earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, General Electric Co increased its bottom line by earning $1.38 versus $1.24 in the prior year. This year, the market expects an improvement in earnings ($1.64 versus $1.38).

• The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Industrial Conglomerates industry and the overall market on the basis of return on equity, General Electric Co has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.

• GE's share price has surged by 28.86% over the past year, reflecting the market's general trend, despite their weak earnings growth during the last quarter. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.

• The gross profit margin for General Electric Co is rather high; currently it is at 51.58%. Regardless of GE's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 9.02% trails the industry average.

• GE, with its decline in revenue, slightly underperformed the industry average of 2.3%. Since the same quarter one year prior, revenues slightly dropped by 0.3%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

Growth of GE

General Electric has learned valuable lessons from the financial meltdown of 2008 - the company has now turned focus towards its core business and diversification. On January 6, 2014, the company agreed for the acquisition of some assets related to life-science of Thermo Fisher Scientific, which would cost the company $1.06 billion. For the past few quarters, GE was showing in upward trend but as of now the stock is going down after hitting a 52-week high of $28 – which allows for a good entry for this options trade. There has been a lot of talk these days about how the interest rates are about to rise. This might be the time for General Electric to makes some gains out of this situation.

General Electric continues to remake itself. Thermo Fisher put these businesses up for sale last year in order to expedite European approval of its pending $13.8 billion acquisition of Life Technologies Corporation (LIFE) which it agreed to buy last April.

The justification for GE's acquisition was explained by John Dineen, chief executive of GE Healthcare: "Life sciences is one of our strongest and fastest-growing business areas, driven by the world's demand for improved diagnostics and new, safer medicines."

The deal "helps GE with its stated ambition of moving into high-tech, high profit margin areas of the market."

According to the Wall Street Journal, this was the third biopharmaceutical acquisition for General Electric in the last three years.

Note that GE does not manufacture pharmaceuticals "but makes technologies and machines that produce drugs. "It is a growing space, but Mr. Dineen stated that the area they are working in within the life-sciences space is a "small industry." Although GE might do additional deals in the future, given the size of the industry "assets don't come up for sale frequently."

The new assets acquired produced about $250 million in sales last year. This will be added to about $13 billion in revenues from the GE healthcare business over the first nine months of last year. Profits during the period from this area amount to only about $2 billion.

It is interesting to hear the justification for the acquisition. Life sciences "is one of our strongest and fastest-growing business areas," and the fact that this is a fast growing area worldwide. But, it is also a "small industry."

General Electric is in the midst of a re-structuring. And, it is a very diversified conglomerate.

It is doing some good things. For example, it is getting rid of a good portion of its finance subsidiary, GE Capital. Jeff Immelt, CEO of GE, would like to reduce GE's reliance on its finance wing from 45 percent, recently, to about 30 percent. At one time before the Great Recession hit, General Electric was earning well over 50 percent of all of its profits from GE Capital.

Standing alone, GE Capital would rank as the fifth largest commercial bank in the United States…that is how large the commitment GE made to finance in the past.

Analysts Opinions

General Electric (NYSE:GE)‘s stock had its “buy” rating reaffirmed by TheStreet in a research note issued on Monday, American Banking News reports.

The analysts wrote, “General Electric (GE) has been reiterated by TheStreet Ratings as a buy with a ratings score of B. The company’s strengths can be seen in multiple areas, such as its notable return on equity, solid stock price performance and expanding profit margins. We feel these strengths outweigh the fact that the company has had subpar growth in net income.”

Also, General Electric has been the subject of a number of other recent research reports:-

• Analysts at Oppenheimer downgraded shares of General Electric from an “outperform” rating to a “market perform” rating in a research note to investors on Friday, January 3rd. They now have a $29.00 price target on the stock. They noted that the move was a valuation call.

• Separately, analysts at Merrill Lynch reiterated a “buy” rating on shares of General Electric in a research note to investors on Thursday, December 12th. They now have a $30.00 price target on the stock, up previously from $29.00.

• Finally, analysts at Barclays raised their price target on shares of General Electric from $29.00 to $31.00 in a research note to investors on Monday, December 2nd. They now have an “overweight” rating on the stock.

One research analyst has rated the stock with a sell rating, eight have given a hold rating and ten have issued a buy rating to the company. The company presently has a consensus rating of “Hold” and an average target price of $27.40.

Analyst Firms Making Recommendations

ARGUS RESEARCH B OF A M L
BARCLAYS CAPITA DEUTSCHE BK SEC
EDWARD JONES GOLDMAN SACHS
J.J.B.HILLIARD J.P. MORGAN
MORGAN STANLEY NOMURA RESEARCH
OPPENHEIMER HLD UBS
WILLIAM BLAIR

Conclusion

At the moment, we are seeing the operations of the company become efficient, resulting in higher margins. Furthermore, the upward trend in interest rates will further enhance the income from GE Capital. However, the actual effect of increasing interest rates cannot be measured until we know the nature of each long-term debt. Nonetheless, GE will certainly benefit from the rising interest rates in the future and offer substantial value to shareholders. Cash flows of the company will also be impacted positively by the increase in interest rates.

Despite the solid price growth, GE still has substantial upside potential. As far as the recent price drop is concerned, it looks like investors are booking their profits. The forward P/E of the stock is 17.1 and the long-term earnings growth rate of 8.9%. For a company of the size of General Electric, it is an extremely impressive growth rate in earnings.

GE is a progressive company that stands to benefit significantly over the long-term from its market presence in an importantly growing global environment.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the GE Apr 2014 29.000 call (GE140419C00029000) at or under $0.21, good for the day. Place a protective stop limit at $0.08 and a pre-determined sell at $0.40.



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