Why Citi Just Added General Electric To Its U.S. Focus List

In a report published Wednesday, Julian Mitchell of Credit Suisse maintained an Outperform rating on shares of General Electric with an unchanged $31 price target while adding the stock to the firm's "U.S. Focus List." According to Mitchell, General Electric faces a "significant" number of company-specific catalysts that can "propel" the stock back towards the $28 to $29 level. At the same time, the company's high dividend yield of approximately four percent should provide downside support. Mitchell continued that the General Electric is now able to pursue other Industrial acquisitions now that its agreement to acquire Alstom has received the necessary regulatory approvals. The analyst added that it is likely several acquisitions have put on hold since the Alstom deal was initially announced in April 2014. Further acquisitions within the Industrial segment could "help push up" the stock's overall multiple. Mitchell added that General Electric is "much more likely" to grow its earnings versus most of its peers as 12 percent earnings per share growth is already "locked in" with Alstom contributing at least five cents per share and the Synchrony swap-out yielding $0.10 of earnings per share. Mitchell also stated that a recent visit to the company's Greenville plant helped "underline the momentum" behind its gross margin expansion efforts and improvements are expected to show as early as the third quarter print on October 16. Moving on to the often forgotten Healthcare segment which comprises 17 percent of Industrial earnings, investor expectations on the business "have little room to fall" following several years of "minimal" profit growth. However, the company will host a Healthcare analyst day (likely in the first quarter next year) and could provide a "clear and much-needed" update that may result in a "re-assessment of the value of the business" by investors. Finally, the company could also see "substantial room" for cost-reductions within the Oil & Gas segment which comprises 15 percent of Industrial earnings. The analyst noted the company has already planned out $0.4 billion of cost cuts in 2016 (on top of the $0.6 billion planned for 2015) with further cost actions likely to occur before year-end. Bottom line, General Electric's high services/aftermarket mix of earnings implies "relatively limited downside risk" in the event of a "weak" global macro environment in 2016 while there is also "little risk" of a dividend cut given the company's under-levered Industrial balance sheet.