My view on General Electric (NYSE:GE) stock is much more optimistic than the bearishness of J.P. Morgan analyst Stephen Tusa, who says GE stock is likely to trend down to $5. I believe that GE stock has strong technical support in the range of $9 to $11, and if economic conditions improve, General Electric could trend even higher in 2020.
Since GE stock is sensitive to economic fluctuations, it is encouraging to see the probability of U.S. recession declining. And with U.S.-China trade conflicts easing up, there are hopes for GDP growth to gain greater momentum. While tensions related to Iran are a concern, I believe both countries are interested in de-escalation.
Overall, I am hopeful that expansionary monetary policies coupled with improved trade relations will bolster GDP growth. My opinion on GE stock is to be “cautiously optimistic” and consider gradual accumulation.
Boeing 737 MAX Headwind Won’t Stop GE’s Aviation Division
With Boeing (NYSE:BA) halting production of the 737 MAX airliner, anticipate a near-term impact on General Electric’s cash flow. When Boeing cut production from 52 to 42 aircraft last April, GE’s quarterly cash flow dropped by $400 million. Nick Heymann, a William Blair & Co. analyst, believes that 737 MAX production halt will hurt GE’s quarterly cash flow by $2 billion.
However, it is worth noting that GE stock has remained strong even after the announcement by Boeing. Clearly, this is a near-term headwind and is unlikely to impact the booming aviation division. One of the key reasons is that General Electric has entered into a deal to build more engines for Airbus (OTCMKTS:EADSY), which will likely offset the negative impact of Boeing’s production stop.
Beyond commercial aircraft, GE is also positioned to benefit from orders by the military. In an era of heightened geo-political tensions, order intake is likely to remain strong. In Dec. 2019, General Electric won a U.S. army contract for 1,700 T700 engines. Similarly, the T901 engine is powering the next generation of U.S. army helicopters. GE has also been working with NASA and Lockheed Martin (NYSE:LMT) to design a new supersonic jet.
Overall, there are ample positive triggers for General Electric’s aviation division, even with the Boeing headwind. I believe that the order backlog will continue to swell in the coming quarters. I have previously opined that GE needs to list the aviation unit as a separate entity. Considering the growth triggers from commercial and military division, I maintain that view from a value creation perspective.
Baker Hughes Stake Sale
One of the major upside triggers for GE stock is an impending deleveraging in the next 12-24 months. With the sale of the bio-pharma division, General Electric has a cash inflow of approximately $20 billion, which will be used for deleveraging.
In addition, General Electric still holds 380 million shares of Baker Hughes (NYSE:BKR). The stock is currently trading at $25, with a one year target estimate for Baker Hughes stock at $29.30. If Baker Hughes does reach those levels, GE could pocket an additional $11.10 billion via stake sale.
The company’s deleveraging strategy therefore seems likely to progress well in 2020. General Electric has previously said that an asset sale could generate $38 billion for the company. This seems likely and should take GE stock higher.
The Bottom Line on GE Stock
The worst seems to be over for GE stock and I am cautiously optimistic for 2020. If GDP growth accelerates and geopolitical tensions decline, GE is positioned to trend higher.
The aviation division remains the key order backlog and free cash flow driver. In addition, the healthcare division will continue to add to the free cash flows.
From a valuation perspective, GE stock trades at a price-to-earnings ratio of 17.0. Valuations are attractive considering the fact that the S&P 500 currently trades at a P/E of 24.5.
Of course, the markets have given GE a discounted valuation due to its debt burden and power segment challenges. However with restructuring efforts, re-rating of the stock is likely in the next 12-18 months.
Overall, GE stock is worth accumulating with strong technical support in the range of $9 to $11.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
