General Electric (NYSE:GE) has befuddled investors. The conglomerate has seen a long and difficult period of decline as GE stock continued losing value.
Once an icon of American business, GE is now a company many investors have simply given up on. And why not? Shares have lost a ton, and the company suffered a string of incapable leadership steering the company in questionable strategic directions.
Yet, the promise of new leadership does seem to be paying dividends this time. Current GE CEO Larry Culp has proven to be a worthy leader. Prudent deleveraging efforts seem to be taking hold, and the restructuring of business lines seems logical.
A Closer Look at GE Stock
The company is pivoting away from what it was, but not to the degree that it is scrapping its roots entirely. This is important, as former directives suggested that the company would somehow align itself as direct competition with Facebook and Google in the digital sphere.
Current directives align the company with the transformation of power generation while remaining strong in aerospace and healthcare.
The company’s strategic direction and execution thereof should actually entice investors this time around. Ironically, investors should believe the company this time, and place GE’s current troubles on external factors.
For a long time, GE investors have suffered from the mistakes of seemingly inept, internal management. Unfortunately, now that the company is making the right moves, its biggest threat comes in the form of the pandemic.
Pandemic and GE Stock
The aviation sector has been gutted by the pandemic. TSA throughput was 704,815 on July 23. On the same day in 2019, it was 2,705,399 people. And TSA throughput has been holding steady at roughly 20-25% of 2019 levels since the beginning of June. For GE, this is not a boon given their reliance on aviation as a revenue source.
GE comprises Aviation, Power, Renewable Energy, Healthcare, Capital business lines. The company should be most associated with jet engines, healthcare equipment, and power generation in the investor mind.
This is not the light bulb and appliance company you may have known in the past. And GE’s Renewable Energy sector is clearly a play to ensure that GE can smoothly transition into a changing energy landscape.
GE will rise or fall based on jet engines, medical imaging, and its ability to navigate the changing energy landscape. Although planes aren’t flying much now and GE’s LEAP Engines are fitted to the Boeing (NYSE:BA) 737 Max, their engine business is in a strong position.
GE deleveraged itself of bad bets earlier in the year. The company gained $11.1 billion after-tax on the sale of Biopharma but realized a $4.6 billion loss on the sale of Baker Hughes. That equates to $6.5 billion net.
Further, GE reduced its dividend in 2018 in order to retain cash. GE is looking to prudently control capital flows, and prior to the pandemic, it was clearly working. GE beat earnings several quarters in 2019, and markets were taking notice.
Analysts Like GE Shares
The analysts who cover GE for The Wall Street Journal are moderately bullish on GE in the coming period. Their consensus is that GE is slightly overweight meaning they believe there is value above the current price.
Those opinions have remained essentially unchanged in the past few months, with slightly more of them rating it a buy than a hold. None have rated it as a sell during that time.
GE will release Q2 earnings on July 29, which will shed more light on the situation. Unfortunately, this article will have been published prior to that release. Nevertheless, investors will react strongly based on how earnings per share actually turn out.
The company was predicting 4 cents 3 months ago, but currently predicts negative 10 cent earnings. A beat would be nice as this company has played intelligently. In any case, investors would be wise to judge GE based on its previous few years under Larry Culp.
Consider Buying Shares
Despite the long-running downturn and the macroeconomic headwinds that GE is facing, the company is turning things around. Investors do have reason to believe that GE will be able to bring them price appreciation this time around. But that appreciation isn’t likely to occur quickly. It’s clear that Covid-19 isn’t going anywhere soon.
And GE is a behemoth getting on the right track, but not yet there. Commercial passenger flight will remain low for some time yet. GE will ebb and flow with those changes.
However, investors should look at GE under the helm of Larry Culp and really judge what he has done. His strategy is sound, and his track record is impressive. Shares currently sit around $6.90.
As a buy-and-hold investment, there are a lot of reasons to believe GE shares could double in 2 to 3 years. Don’t be surprised if the same pundits who claimed GE was going under do an about-face when GE hits $10 or $11.
As of this writing, Alex Sirois did not own shares of any of the stocks mentioned above.
