General Electric (NYSE:GE) is likely going to benefit from the easing of global coronavirus restrictions. As a result, I have changed my mind about GE stock. In my last article, at the end of April, I argued that the stock would languish. But now I think it will begin to recuperate its losses.
Here is why. First of all, economic growth is starting to take hold. On Friday, June 5, the U.S. Labor Department reported that U.S. payrolls rose by 2.5 million in May rather than an expected drop of over 8 million. Analysts are going to see this as a sign of a return to growth.
“Recovery” is the primary thrust of much of their thinking and in their projections. This applies to General Electric’s three main businesses, aviation, health-care, and power.
Second, the reality is that people are going to start traveling more. They are emboldened. Many believe that a vaccine is around the corner. There is pent-up demand to literally get out of the house and go on vacation.
That will lead to airline travel, which, in turn, increases the demand for GE’s jet engines. For example, American Airlines (NASDAQ: AAL) said that it would fly up to 55% of its domestic airline schedule in July. It is going to fly 20% of its international capacity as well. That implies higher sales for GE’s aviation unit or at least a return to a sense of normalcy for GE’s largest sales unit.
Third, Barron’s came out with an article on June 5 that GE’s health care unit is showing signs of life. During the lockdown, elective procedures at hospitals had been put on hold. Now they can start using GE equipment again for those surgeries.
Analysts and GE Stock
Barron’s just contrasted two analysts’ recommendations on GE stock. Both analysts wrote their reports after Raytheon Technologies (NYSE:RTX) said it expects negative FCF during Q2.
One analyst from JP Morgan said GE was worth a “Hold”, which I consider analyst-speak for “Sell.” He put a $5 target on GE stock.
The other analyst from Barclays believes that Raytheon’s profit warning is good news for GE. It shows that all aviation industry companies are in the same boat. He has a $9 price target on GE. Even after last week’s jump, that still represents a 14% upside from the $7.88 June 5 price.
Many analysts are not only discounting 2020 but they are essentially relying on 2o21 as the “recovery” year for GE stock. For example, Seeking Alpha indicates that 13 analysts believe the company will post 41 cents per share in earnings by the end of 2021. That puts GE stock on a forward price-to-earnings of 19 times.
That may not seem like a bargain price, but it is much lower than the average 70 times P/E ratio for 2020, according to Seeking Alpha.
What to Do Next With GE
It seems to me that GE stock’s fate, for now, is highly tied to Boeing (NYSE:BA). Boeing’s airplanes use GE’s jet engines. And Boeing’s fate is tied to that of the airlines and the travel industry.
If people decide to travel, as American Airlines seems to think they will this summer, that will be good news for the airline supplier industry, including General Electric.
I believe this will happen. Expect to see GE stock rise this summer as analysts upgrade their expectations of the company’s free cash flow profile. So far, I do not have a target price.
But I have changed my mind and believe that the stock is likely to retrace a big portion of its fall from $11.16 per share. That is where it ended in 2019.
It is still down 29% from that price. I suspect it can come back at least half of that distance between now and the end of the year.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
