With General Electric due to announce its latest earnings figures on 16 October, investors will be keen to note the impact of its transition away from its financial business, General Capital, and towards the core industrial products. The circa 13% rise over the past seven trading days will no doubt be, in large part, a reflection of the wider market moves. However, the firm is approaching an absolutely key level which could see price either fall sharply or spike higher. With one activist investor speculating a possible 62% rise over the coming two years, could this be a turning point for the firm?
General Electric is one of the oldest firms in America, accounting for one of the few companies that were included in the original listings at the inception of the US stock market. However, despite the age of GE there is clearly a willingness to foray into digital technology to accompany its traditional hardware business.
Long-term CEO Jeffrey Immelt has recently discussed a five-year project which is beginning to bear fruit as the firm announced its own app store, providing apps which can be utilised by other manufacturers who seek to better understand its products and make them more efficient. This has investors excited as it allows for an area of clear growth within what is a steady, reliable and consistent firm.
Another recent boon for many investors has been the new involvement of so-called activist investor Nelson Peltz whose $2.5 billion investment pushes him into the top ten largest shareholder list. However, instead of insisting on a complete overhaul, Paltz sees the firm as being massively undervalued and his recommendations regarding further M&A and buybacks are largely in line with current GE policy. He says the firm is significantly undervalued and expects a move to $40-45 in 2017.
Thus we have a company which has been around (seemingly) forever, with an incredible range of products being sold around the world, yet with plans to grow alternate areas of the business. Add to this the fact it was recently backed by an industry veteran who is speculating a significant appreciation over the coming years. No wonder we have seen such recent upside in the share price.
Going into this earnings release, expectations point towards a fall in adjusted earnings per share, from $0.280 to $0.262, while sales are estimated to fall from $32.7 billion to $28.7 billion. It is clear expectations are low, as the Chinese slowdown eases demand.
Analysts tend to hold a somewhat mixed view, with 11 buys, nine holds, and just one sell. However, from a technical outlook, we are approaching a key resistance point which if broken could lead to significant appreciation in the coming months.
The monthly timeframe shows that the $28.26 resistance level represents the 61.8% Fibonacci retracement from the 2007 highs to 2009’s lows. This area is clearly a major roadblock which has to be broken for any significant progress in the share price. Additionally, we have a long-term trend-line dating back to 2000, which despite not having the fabled third touch, corresponds perfectly with the Fibonacci resistance this month, thus adding further credence to the level.
As such, I am looking for a break and close above $28.26 for a resumption of the rally seen during 2009-2013. Such a break would give credence to Peltz’s notion that we could see $40-45, with $42 in particular looking a key resistance point. However, the inability to break this level would be seen as a warning sign, especially given the recent move lower towards $20. Hopefully the impending earnings release will provide that spark needed to move it above $28.26 to provide GE shares with new lease of life.