No one wants to touch General Electric (NYSE:GE) stock right now, and with good reason.
The company’s aviation unit is getting killed because no one is flying, and no airlines are ordering new planes. The healthcare business is getting crushed because hospitals are busy dealing with novel coronavirus cases. This means delaying general and elective surgeries (which is depressing demand for GE’s healthcare products). Meanwhile, the power business is getting crushed by a lack of activity in the industrial economy amid global mobility and capacity restrictions.
It’s an ugly operating backdrop for General Electric today. No wonder GE stock tanked 42% year-to-date.
But the tide is starting to turn. And GE’s core businesses in aviation, healthcare and power will rebound dramatically over the next 12 to 18 months. As they do, GE stock could double. Here’s why.
A Covid-19 Vaccine
The GE stock bull thesis rests heavily on a Covid-19 vaccine, since the pandemic is what virtually killed demand in all of the company’s industrial end-markets and a vaccine is what could turn the tide.
Fortunately for GE stock, it increasingly appears that we will get a Covid-19 vaccine at some point in the near future, likely by October or November.
All of the leading vaccines out there today – like the one from Moderna (NASDAQ:MRNA) and the one from AstraZeneca (NYSE:AZN) – are breezing through clinical trials with flying colors, and showing robust ability to defend against Covid-19 without producing harmful side effects. Phase 3 trials for multiple vaccines are ongoing and we should have tons of prelim data from those trials within months, if not weeks.
Simultaneously, it appears many organizations – including the FDA – are ready to use Emergency Use Authorization (or EUA) on a vaccine once the data convincingly shows that it works and it is safe.
Net net, it increasingly appears that the base case timeline here is for Covid-19 vaccine approval in the fall. This means early distribution of such a vaccine in November/December/January to military personnel, front-line healthcare workers and government officials. That will be followed by broad distribution of the vaccine to the general public by the first quarter of 2021.
With respect to GE stock, this is important because a vaccine will significantly normalize consumer and enterprise behavior. That will mark a significant turning of the tide for GE stock.
Industrial Economy Recovery
Easy and broad access to a Covid-19 vaccine will greatly diminish the public threat of Covid-19 and spark rapid economic activity normalization in many of GE’s core industrial end-markets.
Take aviation, for example. Consumers will start flying again. Sure, business travel may never rebound to pre-Covid levels. But an increase in consumer travel demand will translate into airlines ordering new planes and plane parts again. GE’s aviation business will rebound in 2021.
Or take the healthcare business. With a vaccine, hospital resource allocation toward Covid-19 patients will be reduced, since there will presumably be fewer Covid-19 patients. Hospitals will resume general and elective surgeries. Consumers will also feel comfortable coming back in for those surgeries. Demand for GE’s various products which help facilitate those surgeries will rebound in 2021.
Or take the power business. A Covid-19 vaccine will dramatically ease global mobility and capacity restrictions, so that industrial factories can get back to running at full efficiency. That will promote increased demand for GE’s power business.
All in all, then, a Covid-19 vaccine would transform GE’s headwinds into tailwinds.
GE Stock with 100% Upside?
With those tailwinds, GE stock has an opportunity to double from current levels.
Here’s the math.
GE’s revenues were $95 billion in 2019. They’ll collapse this year, rebound in 2021 and then likely recover to 95% of 2019 levels by 2022 as GE’s industrial end-markets get back to normal. Assuming so, that puts GE’s 2022 revenues at $90 billion.
Profit margins were around 10% in 2019. Again, they’ll collapse this year, rebound in 2021 and almost fully recover to 2019 levels by 2022. This will be mostly because of economies of scale and GE’s management team is hyper-focused on cost-cutting and improving the long-term profitability profile.
On those assumptions, I think GE can do about about 80 cents in earnings per share by 2022. Throw a typical industrials sector 15-times forward earnings multiple on that and you get a 2021 price target for GE stock of $12.
Shares trade around $6 and change today.
Thus, I think there’s room here for GE stock to almost double over the next 18 months.
Bottom Line on General Electric
Ostensibly, it looks like you wouldn’t want to touch GE stock with a nine- foot pole. But it’s those types of situations which make for compelling contrarian investment opportunities.
Over the next 18 months, the tide will turn in the world’s fight against Covid-19. Industrial economic activity will rebound significantly and GE stock will stage an enormous turnaround.
Buying ahead of that turnaround – while the stock still remains depressed – seems like the smart move.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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 rated one of the world’s top stock pickers 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.