There Is a Future for General Electric Company Stock After All

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General Electric stock - There Is a Future for General Electric Company Stock After All

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The pain in General Electric Company (NYSE:GE) continues. General Electric stock has now plummeted from above $30 in late 2016 to below $15 today.

Sentiment remains undeniably dour. Barron’s recent cover story called for more downside in GE stock. The Wall Street Journal put out a piece about the overly confident work culture at GE about the which helped bring about its demise.

Reuters just put out a bearish piece on the secular headwinds challenging GE’s power business. And to cap things off, GE recently said that earnings this year would fall at the low-end of management’s guide.

It is understandable that General Electric stock has continued on its steady grind lower.

But not all is doom and gloom at GE.

Indeed, I continue to believe that General Electric stock is a good long-term investment. The near-term will be choppy. But GE has the right underlying assets to power this stock higher over the long-term.

GE Aviation and Healthcare Are Valuable Businesses

My bull thesis on GE stock is predicated upon the idea that the company’s Aviation and Healthcare businesses are worth a whole lot more than the Street is currently giving them credit for.

The Aviation business is GE’s crown jewel. It’s a $27.4 billion annual revenue business growing the top-line at a 4% clip. Segment profits are $6.6 billion, and were up 9% last year. The profit margin is 24%, which makes this business the most profitable segment in GE’s portfolio.

Moreover, Aviation profit margins expanded 100 basis points last year. The secular growth narrative is also in-tact, as global economic strength is just now starting to pick-up, and aviation is the type of industry that benefits tremendously from economic growth.

All told, GE Aviation is a solid business that is in the same stratosphere as Boeing Co (NYSE:BA). Boeing has a market cap of $210 billion on operating profits of $10.3 billion last year, so the stock is trading at roughly 20-times operating profits. GE Aviation doesn’t deserve that high of a multiple because growth is relatively muted.

But even at just a 10-times multiple (half that of Boeing’s multiple and far less than the average Industrial’s operating earnings multiple of 17.6), GE Aviation is a $66 billion business. That gets you halfway to GE’s current $130 billion market cap.

The other GE segment that is doing well is Healthcare. GE Healthcare is a $19.1 billion annual revenue business growing the top-line at a 5% clip. Segment profits are $3.5 billion, and were up 9% last year.

The profit margin is 18%, which is among the healthiest in GE’s portfolio. Moreover, Healthcare profit margins expanded 70 basis points last year.

For all intents and purposes, GE Healthcare looks a lot like GE Aviation in terms secular growth profile and profitability. If you give GE Healthcare the same lousy 10-times multiple (even though healthcare companies usually get something like a 16-times multiple), then GE Healthcare is worth $35 billion.

In totality, then, GE Aviation and Healthcare are worth at least $100 billion using lousy, far-below-market multiples. GE’s total market cap is currently only $130 billion.

Clearly, the market is undervaluing GE’s total business.

Bottom Line on General Electric Stock

I’m with the insiders on this one (four insiders have together purchased nearly $56 million worth of General Electric stock while it has languished under $20, and all four insiders are CEOs of big-time tech companies).

Right now, General Electric stock is victim to dour sentiment, intense selling pressure, and downward momentum. But I think there is reason to believe that GE Healthcare and Aviation alone are worth more than GE’s current market cap. Eventually, the market will realize this, and the pendulum will swing.

In the long-term, GE stock should head higher. But the near-term will continue to be choppy.

As of this writing, Luke Lango was long GE. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/future-look-general-electric-stock/.

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