Since September, General Electric (NYSE:GE) stock has soared higher. With increased confidence in the company’s turnaround plan, GE stock has increased by more than 42%, from $8.10 on Sept. 3 to right around $11.53 now.
But does this mean investors have an opportunity for more upside? Perhaps.
Making a contrarian play during the Markopolos non-event would’ve been the best time to buy, but with the turnaround in motion, investors have the opportunity for upside. Under Larry Culp’s leadership, the company is making the transformation it needs to move the needle.
Yet, looking at valuation, General Electric stock is no deep value play. There are also a lot of moving parts in turning around the Titanic-sized ship that is GE. Shares could move higher on better earnings, but the company will likely not receive a valuation premium to its closest peers.
Let’s take a closer look, and see why today’s price may already factor in a successful turnaround.
Headwinds Continue for GE Stock
The recent driver of the General Electric stock price has been the last earnings report. GE reported quarterly results on Oct. 30. The company beat on earnings and boosted its free cash flow guidance. These metrics were top of mind among analysts of the stock.
Increased confidence from the earnings report pushed shares back to where they before the Markopolos report. Does this mean shares will trade sideways going forward? General Electric is in the first innings of its turnaround. Culp and the GE management team have their work cut out for them.
So far, they have made the right moves. Divesting non-core businesses, paying down debt, reducing costs. The whole nine yards. But can this boilerplate turnaround plan work for GE? It may take more to get the General Electric stock price moving again.
GE’s key operating segments continue to face headwinds. Operating losses at the company’s Power segment have improved from the prior year’s quarter. But the business continues to see reductions in orders and revenue. The Renewable segment has seen revenue and order growth, but posted operating losses of $469 million over the past nine months.
Aviation and Healthcare are steady, but the company needs to shrink down GE Capital further. Quarterly results may have moved GE stock, but they were hardly a long-term game-changer.
The turnaround of General Electric is a “wait-and-see” situation. But at the current valuation, is it worth investor’s time to buy and hold? Looking at the valuation, the current price does not compensate much for the risks.
General Electric Is Fairly Valued
The GE stock price may have been hammered over the past few years. But valuation-wise, it’s fairly valued. GE current trades at a non-GAAP forward price-to-earnings ratio of 18.7. Its trailing twelve-month (TTM) enterprise value/EBITDA (EV/EBITDA) ratio of 13.
This is on par with peers like Honeywell (NYSE:HON) and United Technologies (NYSE:UTX). The forward non-GAAP P/Es for both are 21.7 and 18.1, respectively. On an EV/EBITDA basis, GE is priced in the middle. Honeywell’s EBITDA multiple is 15.5, while United Technologies’ is 11.7.
This indicates to me that multiple expansion isn’t in the cards for GE stock. While the company in its salad days commanded a premium valuation, the “new GE” will likely continue to trade at similar valuations as peers Honeywell and United Technologies.
But improvements in profitability could move the GE stock price higher. The question is, are material increases possible?
Some analysts are skeptical of GE’s recent improvements in free cash flow (FCF). They believe they are attributable to one-time events. One major bear is JP Morgan’s Stephen Tusa.
“There is a lot of noise to the numbers,” he said, discussing the FCF results.
Some of that “noise” includes lower restructuring spending. Tusa sees this as a sign that GE’s fundamentals have yet to improve. The analyst also believes GE is “missing guidance” set back in March. Tusa is a bit of a General Electric “permabear”, but he makes strong points.
Investors expect Larry Culp, who had a strong track record at Danaher (NYSE:DHR), to come in, clean house, and make GE a solid performer again. But GE’s faces risks that go beyond improving the profitability of its industrial units. GE Capital’s long-term care (LTC) insurance risks remain a minefield. The company’s approximately $22 billion pension shortfall is another concern.
The Bottom Line on GE Stock
General Electric’s turnaround is still in progress. But the recent rally in the GE stock price may already factor in success. All bets are off whether GE or soar or sink in its turnaround.
I’m not willing to take that risk. But investors who believe that GE will not only survive, but thrive as a leaner entity, should consider buying shares today.
General Electric stock could surprise me, but I prefer the “wait and see” approach.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.