On Feb 27, Zacks Investment Research downgraded General Electric Company (GE) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold), primarily due to tepid fourth-quarter 2013 earnings.
Why the Downgrade?
Over the past week, General Electric has witnessed downward earnings estimate revisions for 2014. This negative revision seems to have resulted from the fact that General Electric failed to comprehensively beat analysts’ expectations and posted in-line earnings. The diversified conglomerate had posted a 2.86% beat in the preceding quarter, and investors probably had expected it to post a healthy beat this quarter as well.
In addition, the Zacks Consensus Estimate for the first quarter of 2014 is currently pegged at 32 cents, reflecting a year-over-year contraction in growth of nearly 18.0%. For the current year, the Zacks Consensus Estimate has also moved down by a penny to $1.69, reflecting a 5.9% decline over the past week.
General Electric is also expected to underperform its peers in the medium term as its growth estimate for the next 5 years is pegged at 8.1%, compared with the 11.3% for the overall industry. Furthermore, General Electric’s current PEG ratio is at 1.85 compared with the industry PEG ratio of 1.51. Conventionally, a PEG ratio of 1 or less is considered to be healthy or undervalued stock.
General Electric is in the process of downsizing its financial services business, GE Capital, which generates roughly 45% of its operating earnings. General Electric aims to reduce revenue contribution from GE Capital to about 1/3 of total earnings in the future. Its Industrial segment is also struggling to achieve the margin expansions and consistent earnings growth delivered by its peers. The company’s significant international presence further exposes it to currency fluctuations, political and economic disruptions — all of which can directly impact its profits.
Other Stocks to Consider
Other stocks in the industry with favorable Zacks Ranks that are worth considering include Noble Group Limited (NOBGY), 3M Company (MMM) and Hutchison Whampoa Limited (HUWHY). While Noble Group carries a Zacks Rank #1 (Strong Buy), 3M and Hutchison Whampoa hold a Zacks Rank #2 (Buy) each.
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