General Electric Company (NYSE:GE) – IoT market could anchor GE growth in the next decade

[NYSE:GE]: Yesterday, General Electric Company (NYSE:GE) was one of the biggest gainers, in a market that was largely sluggish. This followed news that the company intends to spin off its IoT business, into a new wholly owned subsidiary. The market excitement around this move by GE is not without basis. IoT is a fast-growing market, and if GE dominates in it, the company’s revenues could grow fast over the next decade. Forecasts peg the IoT market growth at a compound annual growth rate of 27% from 2018 to the year 2024. By that time, the market is expected to be worth anywhere between $6 and $10 trillion. As such, the fact that GE is creating a company that will focus solely on this market could see it gain a sizeable share of this market.

For GE investors, gaining market share in a high growth market is a big deal. That’s because the company faces a number of market risks. For starters, the company is heavily leveraged. Its total debt stands at $114.96 billion. Its operating margin is also negative (-1.86%). This is an indicator that its operational costs are very high, due to heavy investments in capital intensive industries like transport and aviation. While these are stable investments that will pay off in the long-run, highly leveraged company could take a hit from rising interest rates in the U.S. That’s because, as interest rates rise, so will the cost of financing, and negatively affect revenues for companies like GE.  Therefore, the fact that the company is forming a company that is focused solely on IoT could be a balancing factor in case such risks materialize. This would also act as a stabilizing factor for GE’s stock price over the next couple of years.

Besides, the stabilizing factor of the IoT market and other tech investments, GE’s interest rate risks are offset by the fact that it operates in very stable industries. Industries like aviation and healthcare are stable, and risks of GE defaulting on its debts due to rising interest rates are quite low. This explains why in spite of being heavily leveraged, the company has a current ratio of 1.83. This current ratio can give two inferences. The first one is that its investments are paying off, and it’s fully capable of meeting all its obligations. The second one is lenders have confidence in GE and would comfortably continue to lend to it, if it needs financing, on the basis of the stability of the markets it operates.



This stability may explain why most analysts are of the view that this stock is a worthy hold. According to a CNN Money forecast, out of 22 analysts polled on GE, 11 of them believe that it is a good hold.  One believes it will beat the market. None of them believes it will underperform, though 2 are short on GE.  This positive consensus is directly related to this company’s stability and investments in low risk markets.

 

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