Credit Suisse has brought down its revenue estimates for General Electric Company (NYSE:GE) while it has kept the associated price target at $34, based on more realistic sales expectations for the industrial conglomerate. The research house has maintained an Outperform rating for the conglomerate giant which signals that it is a good stock to buy.
The research house projects revenues for General Electric to grow at a mere 0.5% against an optimistic 2016 revenue guidance from General Electric of 2-4%. The decrease in revenue estimates is primarily due to declining revenues from the energy business segments of the conglomerate. The oil and gas segment revenues are expected to decline by more than 20% now versus an estimated amount of 15% from General Electric’s guidance.
Secondly, the power and equipment segment has started off 2016 in a rather depressed manner with majority of its deliveries scheduled to deliver late in 2016. Organic sales are expected to decline in the first two quarters, with majority of the decline attributable to the oil & gas and transportation segments.
In addition to this, General Electric’s aviation group is also expected to face some headwinds. The aviation segment is the strongest segment for the conglomerate, as it generates 23% of the total revenue. It is expected to grow at just 5% because of lower orders from Boeing for commercial airplane engines on the back of the reduction in commercial airplane production in its 2016 guidance.
Despite heavy exposure to prevailing economic conditions, the industrial conglomerate has enjoyed order trends no worse than most industrial companies. Hence, the research firm urges investors not to panic over weaker revenues expected from General Electric.
Furthermore Credit Suisse also mentions the huge aviation backlog that the conglomerate enjoys; now worth $15 billion. With no future cancellations in sight, it should give an uplift to the aviation segment. Secondly, with Boeing Co (NYSE:BA) successfully testing the MAX 737 airplane, and the MAX 737 having General Electric’s LEAP engine, gives more hope for this segment.
Further, the research house also includes revenues from Alstom for its 2016 estimate, as previously in 2015 General Electric had excluded Alstom while its takeover was still in process. The research house also predicts that the healthcare segment will do well despite decrease in revenue from the segment in the fourth quarter of 2015. This is mainly due to increasing revenues from competitors in the same segment.
Additionally the research institution is confident that General Electric will find more ways to reduce costs in the oil and gas segment including the $0.4 billion it has already outlined. Lastly, the industrial conglomerate has a great amount of cash, $157 billion, that it is keen to spend on buybacks, dividends as well as major takeover bids. The conglomerate giant is on the prowl for potential vertical and horizontal integration that it can make to further support its recent industrial focus.
General Electric has been in the limelight throughout 2015 and continues to be this year as well. Earlier in November 2015, the research house took off General Electric from its United States focus list of companies due to expectations of flat organic sales. However, with a strong 2015, increasing sales by 3%; Credit Suisse has fully factored the risk of flat sales into its evaluation.
General Electric remains the top pick among conglomerates for Credit Suisse. The research institution has indicated that the conglomerate looks to be headed towards great returns with shifted focus on their core segments. Credit Suisse has advised investors to not worry about concerns raised from the fourth quarter 2015 results for General Electric.