Despite a slew of fundamental concerns relating to the coronavirus outbreak in China and delays in the anticipated return of the Boeing (NYSE:BA) 737 plane, shares of global industrial conglomerate General Electric (NYSE:GE) have outperformed in 2020. Year-to-date, GE stock is up more than 3%, while the S&P 500 has ticked up less than a percent.
There’s a good reason for this. The core fundamentals underlying General Electric are improving and will continue to improve throughout the rest of the year. These improvements will reinvigorate the company’s growth narrative.
Revenues and profits will start rising again. At the same time, balance sheet pressures and liquidity risks will ease. Investors will grow more bullish about the company’s forward growth prospects.
And, as all that happens, GE stock will move higher.
With that in mind, if General Electric starts to make a big move lower on coronavirus concerns, I think that dip will be a golden buying opportunity.
General Electric’s Fundamentals Are Improving
In the big picture, the bull thesis on GE is supported by the reality that General Electric’s fundamentals are improving, and will continue to improve for the foreseeable future.
Right now, this reality may be hard to see. Investors are concerned that the Wuhan coronavirus outbreak in China presents a huge risk to global economic growth and expansion. But, such outbreaks are not uncommon (China gets one about every ten years or so).
Previous outbreaks have been much more severe (the 2002 SARS outbreak infected far more people, had a far higher mortality rate, and was dealt with in a much slower fashion). And, even in more severe previous outbreaks, the impact on industrial economic output outside of China was very limited (U.S. PMI readings dropped in early 2003, but only for a few months, before rebounding in a big way).
In other words, current concerns regarding a global economic slowdown at the hands of the Wuhan coronavirus are being overstated.
Removing those overstated concerns from the picture, conditions everywhere else remain supportive of an industrial economy rebound and bigger tailwinds for GE in 2020.
Interest rates across the globe remain at or near record lows. Central banks globally are injecting liquidity by expanding their balance sheets. U.S.-China trade tensions are easing. Global PMI readings are rebounding. Corporations are steadily regaining confidence.
All in all, then, the industrial economy in 2020 should be defined by newfound stability, reinvigorated spend, and bigger growth. Against that backdrop, General Electric’s numbers and growth trends will improve.
General Electric Stock Will Move Higher
General Electric stock will move higher in 2020 thanks to two things. First, forward profits estimates will move higher, thanks to improving growth trends and rising Wall Street confidence. Second, the forward earnings multiple will expand, buoyed by increasing investor optimism and easing balance sheet and liquidity concerns.
On the first point, thanks to the industrial economy tailwinds, General Electric will deliver better-than-expected revenue, margin, and profit numbers over the next few quarters. Successive earnings toppers will push Wall Street analysts to lift their forward profit estimates for GE. Consequently, 2021 earnings per share estimates (which presently sit around $0.85) will likely move closer to $1 by the end of 2020.
On the second point, successive earnings toppers and renewed growth momentum will breathe confidence back into the investor base. So will asset sales and debt reduction, which remain a top priority of management. As investor confidence improve, the multiple on GE stock will expand. By the end of 2020, GE will likely trade at an industrials sector average 17-times forward earnings multiple.
Now, let’s combine these two numbers. A 17-times forward earnings multiple on $1 in 2021 projected earnings per share implies a 2020 price target for GE stock of $17. That’s way above where shares trade hands today.
Bottom Line on GE Stock
GE looks good for 2020. Recent developments with respect to the coronavirus outbreak in China or Boeing plane delays do not change this reality.
As such, if the stock drops on such concerns, that drop will be nothing more than a buying opportunity.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
