Struggling industrial conglomerate General Electric (NYSE:GE) attempted to stage a huge rebound in 2019 behind new CEO Larry Culp’s various cost-cutting and debt-reduction initiatives. At first, the rebound got off to a hot start. General Electric stock soared 40% through the first three months of 2019. Ever since, though, the rebound has fizzled out, and GE stock has dropped 20% from those early 2019 highs.
Will the rebound in General Electric stock resume anytime soon? Potentially, yes. But, only if these three things happen.
First, the global industrial economy needs to improve. Second, management needs to keep their foot on the gas in terms of cost-cutting and debt-reduction actions. Third, the company’s lifeline for future growth — the aviation business — needs to sustain healthy growth.
Fortunately for GE stock bulls, I think all three of those things will happen over the next six to twelve months. I believe that General Electric stock can and will rally during that stretch.
GE’s Fundamentals Should Improve
The fundamentals underlying GE stock should improve over the next six to twelve months, and give the stock ample firepower to stage a sizable rally next year.
First, and foremost, the global industrial economy should improve in 2020. Long story short, the U.S.-China trade war has had huge indirect impacts across the global industrial space by reducing business confidence. This has led to reduced corporate investment, which has caused the industrial economy to compress meaningfully.
But, signs are emerging that trade tensions between the U.S. and China are finally starting to de-escalate. If trade tensions do de-escalate, global business confidence will stabilize, which will lead to a rebound in corporate investment levels and breathe life back into the struggling industrial economy. This new life should provide a strong macro tailwind for General Electric stock.
Second, management appears committed to keeping their foot on the gas with respect to cost-cutting and debt-reduction measures. Just this month, GE announced that they would freeze pension plans for 20,000 U.S. employees in a move that projects to reduce GE’s net debt by roughly $5 billion. This is yet another move in the right direction of GE becoming a less bulky, less indebted, slimmer business. So long as management keeps making these moves, then investor sentiment surrounding GE stock should continue to improve.
Third, GE’s critical aviation business should sustain healthy growth for the foreseeable future. Many see aviation as the company’s best business — and with good reason. It’s growing, it’s profitable, and it’s immersed in a market with very few competitors and tons of demand. If the industrial economy does rebound in 2020, then the aviation market should rebound, too, creating a rising tide which should lift all boats in the market, GE Aviation included.
General Electric Stock Can Run Higher
The numbers work out so that — if the aforementioned three drivers emerge in 2020 — then General Electric stock can run towards $13.
Improving industrial economy trends alongside sustained healthy growth in the aviation business will help GE stabilize sales over the next few years. At the same time, continued cost-cutting will pull expenses out of the system. Less expenses on a stable revenue base imply higher profit margins. Simultaneously, leverage reduction will boost investor sentiment, and lead to increased long-term confidence and a higher valuation multiple.
Putting all that together, General Electric has an opportunity to grow profits at a mild pace over the next several years, and expand its valuation multiple back to historically average levels. My modeling suggests 80 cents is a very doable FY21 EPS target. The five-year-average forward earnings multiple is 16. That combination produces a FY20 price target for GE stock of nearly $13.
General Electric stock trades below $9 today. Thus, potential upside over the next 12 months looks compelling.
Bottom Line on GE Stock
General Electric stock isn’t a long-term winner. But, the stock is cheap, and there’s enough good going on here that the stock doesn’t deserve to be cheap anymore. That dynamic ultimately implies that GE stock should rally from here over the next few quarters.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
