Credit Suisse had an Outperform rating for GE with a target price of $30. This is based on an increasing focus on margins and industrial margin expansion, which should accelerate in the 2015 fiscal year. Ultimately this will revise estimates.
The estimates assume that the Appliance segment is divested by mid-2015 and Synchrony is divested by the end of 2015. Credit Suisse does not expect earnings from Alstom.
Mitchell further detailed in his report on the margins:
Industrial margin expansion should accelerate in FY15 as productivity efforts broaden beyond SG&A: GE is making good progress with generating savings at the SG&A level (corp. and segments), but these have been largely offset in the past couple of years by falling gross margins and rising R&D spend; SG&A represents just ~17% of GE’s total cost base.
However gross margins are looking to change going forward:
On gross margins, (i) GE is adopting a much more active approach to reducing COGS (which are 4-5X larger than SG&A costs), driven by Dan Heintzelman; (ii) the ‘Mix’ headwinds in the COGS in 2014 should abate in 2015, and we see few ‘new’ headwinds (other than H frame turbine shipments). On R&D (just under one third the size of SG&A costs), spend in $ terms should be flat in 2015, implying a small tailwind as a share of sales. Finally, reported margins (including corporate costs) should see a boost in 2015 as gains (Appliances, Signaling) offset the majority of the restructuring charges, which has not been the case in 2014.
Credit Suisse revised its estimates for earnings per share in 2015 to $1.80 from $1.76 and in 2016 to $1.88 from $1.91.
Shares of GE were up less than 1% at $25.70 in afternoon trading Tuesday. The stock has a consensus analyst price target of $29.00 and a 52-week trading range of $23.69 to $28.09. GE’s market cap is about $258 billion.
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