Once labeled as a struggling industrial conglomerate whose growth outlook was uncertain and which had too much debt, General Electric (NYSE:GE) has turned things around in a big way over the past six months. During that stretch, GE stock has risen about 45% as the company’s new management has taken all the right steps to increase the certainty of its long-term growth outlook and reduce its debt load.
To be sure, the shares have been choppy over the past few weeks, mostly because investors are concerned that the continued production delays of Boeing‘s (NYSE:BA) 737 MAX planes, as well as the coronavirus of China outbreak, will weigh on General Electric’s first-quarter numbers.
Those things will weigh on GE’s Q1 results. But neither of those challenges will extend much past Q1. And, once those issues disappear, they will be replaced by longer-running and more important positive catalysts.
As a result, I think investors should ignore the concerns about the 737 MAX planes and the coronavirus. Instead, they should buy the stock on any major near-term weakness caused by these concerns. And, above all else, they should stick with GE stock because its rebound is far from over.
Ignore the Near-Term Concerns
When it comes to GE stock, I think investors would be wise to ignore the near-term worries about the 737 production delays and the coronavirus-related slowdown of China’s economy because both of those issues won’t last too long.
On the 737 front, Boeing is the most established commercial plane maker in the world. Its management dropped the ball on multiple aspects of the 737 MAX, and that ultimately resulted in tragedy. Appropriately, it will take time for the world to forget that and for Boeing to resume full production of the planes. But time will heal all of those wounds because, in the big picture, this is one hiccup in what has otherwise been a phenomenal, multi-decade history of plane craftsmanship for Boeing.
Thus, in mid-to-late 2020, Boeing will start producing and selling 737 planes again. Once it does, GE’s Aviation unit will get a nice boost.
Meanwhile, with respect to the coronavirus outbreak, it is a big, scary, and deadly epidemic that has brought daily life in parts of China to a screeching halt. Yet, the coronavirus, much like previous modern epidemics, won’t last more than a few months. By the summer, it is quite likely that the virus will be old news, thanks to quarantining measures and progress on a vaccine.
Once that virus fades from the scene, economic activity in China will rebound sharply and quickly, much like it did in 2003 once the SARS epidemic passed.
GE’s Positive Catalysts Remain Robust
While the negative issues impacting GE today are near-term in nature, the positive catalysts that will support its growth over the next few quarters are long-term in nature.
Central banks across the globe, including the U.S. Federal Reserve, have injected a ton of fiscal stimulus into their economies in 2019. That fiscal stimulus has provided ample firepower that will help bring about a healthy economic rebound in 2020. Further, in response to the coronavirus outbreak, the People’s Bank of China and several central banks across Asia have upped their fiscal stimulus this year, providing even more firepower to support an economic rebound in those regions once the coronavirus crisis passes.
At the same time, U.S.-China trade tensions are easing and will likely continue to ease through the U.S. election.
Thus, the global economy right now is defined by tons of fiscal stimulus and increasing geopolitical stability. That’s a great environment.
As a result, corporations will increase their capital spending, after curtailing them for much of 2018 and 2019. The industrial economy is built on the back of capital spending. Thus, as capital spending trends improve in 2020, the global industrial economy will rebound.
GE’s Rebound Is Far From Over
At the same time that the macro backdrop is improving, GE’s management is doing everything right to optimally position the company to reap the rewards of this improvement.
First, management is divesting non-core businesses. It sold the company’s biopharma division to Danaher (NYSE:DNH) last year, and it’s reportedly in talks to sell the company’s steam power division. Second, GE is using the proceeds to pay down its debt and increase its cash flows. Third, the company’s core businesses are winning new contracts. For example, GE just signed a preliminary $1.8 billion deal to develop new energy and health projects for the Democratic Republic of the Congo.
As long as these trends continue, GE’s growth should improve as the industrial economy rebounds.
After the 45% rally of the shares over the past six months, some of this growth is priced into GE’s shares.But not all of the growth is priced in. Simply consider that analysts’ average 2022 earnings per share estimate is around $1, and that GE’s average forward price-earnings ratio of the past five years is about 16.5. Based on those two metrics, a reasonable 2021 price target for the stock is $16.50.
That’s more than 30% above the stock’s current level. So, it’s safe to say that this big rebound is far from over.
The Bottom Line on GE Stock
GE’s huge rebound started in 2019. It won’t end in early 2020 because of near-term concerns about the 737 MAX and coronavirus.
Instead, this rebound will likely persist over the next several quarters, powered by the increasing strength of the industrial economy, sustained debt-load reductions, and cash flow improvements.
Consequently, the near-term weakness of GE is nothing more than an opportunity to buy a stock whose big rebound is only halfway done.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.