After bottoming in late summer at around $8.00, General Electric (NYSE:GE) could fall from the $11.18 recent close. Investors may want to lock in profits after GE stock rose by over 67% from its 52-week low.
GE may get stuck in a trading range until the company reports results on Jan. 29. Markets will look more carefully at GE’s aviation division in particular.
Boeing’s (NYSE:BA) decision to halt production of the 737 MAX will hurt the entire supply chain. This might include GE but markets already priced in the bad news. In the third quarter, GE said that its working capital was negative $1.8 billion. It said:
Working capital was negative $1.8 billion primarily driven by accounts receivable, which was impacted by the timing of collections from Boeing related to the 737 MAX and a reduction in certain receivable monetization programs including continued runoff of long-term factoring and the decision to discontinue and shrink higher cost or inefficient factoring programs.
GE stock may already account for the Boeing headwind. Plus, management may already have forecast 737 MAX production delays. It had already expected service not to resume this year. Eventually, Boeing will earn FAA certification and the plane will return to the market.
GE is working closely with Boeing, so it will be well-prepared with the eventual return of the plane. In the meantime, GE’s aviation unit has other plane engine contracts to work through.
It already expects improving cash flow thanks to generally strong demand. Last year, the unit generated over $4 billion in cash flow even after order delays from Boeing’s MAX.
Positive Catalysts Ahead
GE reported adjusted Industrial operating margin expanding by 130 basis points. Healthcare and disciplined cost controls at its Power division lifted its performance.
The sale of a portion of its Baker Hughes stake bought in around $3 billion. And the Wabtec exit added $1.6 billion. GE applied the cash from asset sales to pay down $5 billion in industrial debt.
With lower interest costs on debt combined with better cost controls, investors may expect free cash flow growth in the year ahead.
For example, operational costs at the Power unit are moderating. For energy investors, GE is becoming an attractive alternative energy investment. It delivered around 1,400 turbines and repower kits in the third quarter.
GE still has work to do with strengthening its renewables unit. Although demand for onshore wind equipment improved, margins were hurt by an unfavorable product mix.
Still, renewable energy orders grew by 30% to $5 billion. And because the addressable market for renewables is massive, GE must continue to prioritize growing in this segment.
“Obviously, renewables is an important business. You saw earlier in the week the IEA come out with a forecast that would suggest the renewables space could be a $1 trillion business over the next couple of decades,” CEO Larry Culp said. “[It’s a] significant opportunity from a top-line perspective, but…we need to deliver better profitability amidst the growth we’re enjoying today let alone growth that’s down the road.”
Your Takeaway on GE Stock
Investors may assign a discount rate of 9% and revenue stabilization (0% growth) in a 10-Year DCF Growth Exit model.
This implies that the stock is worth $11.60. So, when GE reports at the end of January, investors may update the model to come up with a more accurate price target for General Electric stock.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
