General Electric (NYSE:GE) is not getting enough credit it deserves. The stock traded around $9.50 – $10.50 for much of 2019 only to close recently at $9.34. Yet the strong leadership of an experienced CEO, unwinding Baker Hughes GE (NYSE:BHGE), and further assets are all simplifying GE’s business.
Eventually, the lower debt load combined with a return to revenue growth will reward GE stockholders.
Asset Sales and GE Stock
According to Wall Street Journal, asset sales will bring in around $38 billion in cash, which in turn will assist GE in cutting its debt levels. The company already plans to buy back $5 billion worth of its debt to improve its balance sheet. It will raise $2.7 billion through the sale of its Baker Hughes minority holdings. $21.4 billion, coming from the planned sale of its bio-pharmaceutical business, will also ease its debt load.
GE is aiming to bring the debt load of its industrial businesses to sub 2.5 times. Selling down more assets will bring in more cash and lower its debt obligations. It will not aim for top-line growth. So as it sheds its locomotives division and becomes a smaller company overall, where will its revenue come from?
Buy GE Spin-Off Baker Hughes Stock Instead
Investors who are getting nervous over the shrinking revenue ahead may instead buy GE spinoffs. With GE no longer involved with Baker Hughes, the oil and gas equipment and services company could bounce back in a hurry. Still, BHGE stock needs oil prices to recover. So, investors may bet that energy prices stabilize, leading to a higher rig count. Most recently, rig counts fell for three consecutive weeks. The total active U.S. rig count fell to 885 on the week ended Sept. 13.
If energy prices continue to weaken, investors are better off holding GE stock instead. CEO Larry Culp is very transparent with GE’s strengths and weaknesses and is slowly winning over investor trust. Stabilizing GE’s business will take a few quarters. If GE starts reporting solid earnings, it will also restore its dividends, attracting income investors. Year-to-date (YTD), investors bought GE shares to signal their confidence in GE and the CEO. The stock is up 25% in that time, compared to the 20% YTD increase in the SPDR S&P 500 ETF (NYSE:SPY).
It is worth noting, too, that GE shares in the last year fell 22%. Even so, the stock’s short float is just 1.49% because few investors want to bet against GE stock at these levels.
Big Contract Ahead
A request for proposal from the U.S. Air Force for new B-52 bomber engines by the end of this year could bring up to $7 billion for the bidders. GE, Pratt & Whitney, and Rolls Royce are the three potential engine providers. GE has a good chance of winning. It has at least two offerings that suit the B-52: the CF34-10 and the “Passport” engine. Having a reliable CF34 engine for the B-52 is a must for the Air Force. Conversely, the Passport has solid fuel burn and range.
Valuation on General Electric Stock and Your Takeaway
A 5-year DCF Growth Exit model suggests that the GE stock price is at least 30% below its fair value. To justify an about $13 price target, GE’s EBITDA as a percentage of revenue is allowed to slip to as low as 11%. But its revenue growth rate cannot fall in the double-digits more than once in the next five years. Simplywall.St has a similar view, that GE’s intrinsic value based on future cash flow value is over $14.
All of these price targets are guesses for now. Until GE reports a profit, investors may not confidently calculate a reliable price target for GE. In the near-term, the good news is that the selling pressure is easing and the stock is attracting buyers. It just needs a few quarters of profit growth to finally win over investors.
As of this writing, the author did not hold a position in any of the aforementioned securities.
