General Electric (NYSE:GE) stock has plunged in 2020 as the novel coronavirus pandemic almost entirely halted the industrial economy in March and April.
GE stock is down 40% in 2020.
But throughout May and June, industrial economic activity across the globe has meaningfully perked up, with China’s industrial economy, one of the largest in the world, actually expanding in May.
GE stock has not followed suit.
This lack of a recovery by GE’s shares despite the broad recovery of the global industrial economy isn’t a warning sign; it’s an opportunity. Those who buy the stock on weakness will see returns of 50%+ over the next 18 months.
The Recovery of the Industrial Sector Is Here to Stay
There’s no denying the obvious. As nations across the globe have eased mobility and business restrictions, the industrial sector has meaningfully rebounded from its April lows.
In May, the U.S. Manufacturing Purchasing Managers’ Index rebounded strongly. It did the same in the U.K, the Eurozone, India, Brazil and Russia.
General Electric, despite being at the epicenter of the global industrial economy with its Aviation and Power businesses, hasn’t rebounded. That’s because of pervasive fears regarding a “second wave” of Covid-19.
Long story short, Covid-19 case counts and hospitalizations are rising across the U.S. There is now a sense that we may have reopened too quickly. A number of states, including Texas, are consequently pausing their reopening efforts until this second wave is under control. A pause in those reopening efforts could equate to a pause in the industrial economy’s rebound, and therefore, a lack of potential gains by GE stock.
But that thinking is unnecessarily short-sighted.
We will get this second wave under control. And when we do, the reopening process will resume. Consumers, authorities and businesses alike will continue to keep the world turning while managing Covid-19 risks with things like social distancing and mask wearing.
Everyone will only get better at this balancing act over the next few months. As they do, the overall economy, including the industrial sector. will continue to recover.
Alongside the recovering demand of its core-end markets, General Electric’s growth trends will meaningfully improve and GE’s stock will finally bounce back.
Can General Electric Stock Reach $10?
Those who buy GE’s stock after its recent retreat will likely net returns of 50%+ over the next 18 months.
General Electric generated about $95 billion of revenue in 2019 on profit margins, excluding some items, of 10%. GE’s revenues will plunge in 2020, before recovering in 2021 and 2022.
By 2022, industrial economic activity will likely rebound to its 2019 levels. Because GE’s management is downsizing the company, General Electric will be a marginally smaller player in that market. Consequently, GE’s 2020 revenues will probably be around $90 billion or slightly below its 2019 top line.
Because of management’s cost-cutting and downsizing efforts, GE’s profitability should improve over the next few years. That increase in profit margins should help offset its loss of revenue.
Ultimately, I think the firm’s 2022 adjusted profits will be roughly equivalent to its 2019 adjusted profits. In 2019, GE’s adjusted earnings per share came in at 65 cents.
If its EPS in 2022 is expected to be the same as it was in 2019 and its forward earnings multiple is 15, which is average for the industrial sector, then GE stock will trade for about $10 in 2021.
That’s roughly 50% above where the shares trade today.
The Bottom Line on GE Stock
The rebound of the industrial sector which began in May will persist over the next few months and quarters. As it does, GE stock will rebound by 50% or more over the next 18 months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.