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Good Momentum for Growth at GE

With tailwinds in its energy business and the ability to pass along cost increases to its customers, General Electric is poised to continue growing, says Morningstar's Daniel Holland.

Good Momentum for Growth at GE

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. The Wall Street Journal recently named six Morningstar analysts as the Best on the Street. I am here with Daniel Holland. He was named one of the top electronic and electrical manufacturing equipment analysts. We'll talk a little bit about the industry and see what his top picks are right now.

Daniel, congratulations. Thanks for joining me.

Daniel Holland: Well, thanks for having me, Jeremy.

Glaser: So, let's talk a little bit about the industry as a whole. Can you talk a little bit about some of the tailwinds and headwinds that have been affecting the sector or what do you think will affect the sector in the coming year?

Holland: Well, without a doubt, the recession put a bit of a cramp on capital spending, which in turn really affected lot of the companies that I cover. So when you think about manufacturers out there looking to make investments in their own infrastructure, and also just governments, cities, municipalities, and whatnot, investing in their own infrastructure, everybody pulled back with the downturn in 2008-09. But over the last year or so, we've really started to see spending pick back up and things improve.

Now, with a number of our firms, you've got very strong balance sheets, a lot of cash, and the desire to go out there and spend money on acquisitions and things like that. So you've got a lot of pretty good momentum going forward into this next cycle.

Glaser: If you look at these companies, obviously, many are global in nature. Have they seen a lot of the demand coming from United States from domestic sources or are they really selling a lot into emerging markets and other parts of the world?

Holland: Without a doubt, emerging markets are a big story, a big part of it. If you're able to sell into China and India, you're going to have a pretty good growth rate on your top line, but, surprisingly, at least to a number of people is that the United States and the Western markets have held up relatively well after the recession. And it gives you another little boost going into the next cycle. I kind of think that when you have all of those different factors firing for you, you've got a good chance of success for the firm's earnings growth.

Glaser: We hear a lot about inflation and people worrying about inflation. Are higher input costs something that worry you?

Holland: They do for the companies that aren't able to pass those onto their customers. By and large, when you're talking about a General Electric or an Emerson or somebody like that, those guys are able to pass along any cost increase they have onto their customer. It's not that big of a concern, but with some of the more commoditylike products out there, that's something you have to pay a special attention to because that's one way that you can see these currently really high operating margins shrink pretty quickly.

Glaser: If you look at some individual names that you like, what are some of your favorite players in this space?

Holland: Of course, for the last couple of years I have thought that General Electric has been undervalued by the market, and I still believe that that currently with its portfolio, it's about as strong as it has been in a very long time. Even Jeff Immelt said this is the best portfolio that he's had in a decade that he has been the CEO of General Electric. So if you look at a lot of the tailwinds in its energy business as well as aviation actually starting to kickback around, you've got good momentum for growth out of General Electric.

Additionally, ABB is a company that seems to be positioned well in all of the right markets and has the right products to do well. So if you look at that stock, we currently think that the stock is relatively undervalued, as well, with some pretty good growth momentum coming forward.

Glaser: Sounds great. Daniel, thanks so much for talking to me.

Holland: Thanks very much, Jeremy.

Glaser: For Morningstar, I am Jeremy Glaser.

 

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