Amidst a bloodbath on Wall Street wherein the major indices all shed more than 3% on fears related to spiking Covid-19 cases, General Electric (NYSE:GE) stock was a surprising bright point, rising nearly 10% on the back of much better-than-expected third quarter earnings.
Talk about a unique day. For years and years, while the markets have powered higher, GE stock has been a laggard. Now, in late October, markets are plunging, and GE stock is surging.
The dynamic has been flipped on its head.
This has happened because the new management team at General Electric is executing flawlessly against a challenging macroeconomic backdrop, thereby giving the market confidence that once this challenging macroeconomic backdrop improves, GE stock will fly higher.
That’s exactly what will happen.
The Covid-19 crisis should significantly abate throughout 2021. As it does, activity in GE’s core end-markets will significantly improve. Those improvements will couple with management’s strong execution to power a big rally in GE stock. That big rally will carry shares all the way to $12.
Here’s a deeper look.
General Electric’s Strong Earnings
General Electric’s third quarter earnings report was strong in that it showed management is doing everything right to stabilize this sinking ship.
Specifically, GE’s revenues dropped only 12% in the quarter, much better than the 20% drop reported in the second quarter. Operating margins fell by just 310 basis points, much better than the 1,030 basis point drop reported in the second quarter. Adjusted profits and free cash flow peaked into positive territory, after spending several quarters in the red.
In other words, the job is far from done. GE’s growth trends are still largely negative. But they are rapidly improving, and the only thing holding them back really is a dour macroeconomic backdrop.
Thus, the thinking is that once the Covid-19 crisis abates and demand in GE’s core aviation, healthcare and energy end-markets improves, this company will get back on a strong upward growth trajectory, and GE stock will surge.
Of course, the big question is: will that actually happen?
I think so, and soon.
Over the past few months, economic activity in GE’s core manufacturing end-markets has significantly improved, as evidenced by a sharp uptick in manufacturing PMI readings across the globe.
Sure, rising Covid-19 cases globally will likely slow this recovery in manufacturing activity as more and more countries impose stricter and stricter lockdowns to thwart the spread of the virus. But, such lockdowns will prove temporary, because we have more tools in our toolkit to fight this virus than ever before, meaning we should be able to limit the negative impacts of broader spread. Also, a vaccine is on its way, and will likely be broadly available by sometime in 2021.
Thus, while the rebound in global manufacturing activity will be choppy, it will persist.
As it does persist, GE’s top-line growth trends will materially improve. Revenue growth rates will go from negative to positive. Positive revenue growth will converge on a reduced expense base to spark meaningful profit margin expansion and significant profit growth.
Significant profit growth in 2021 is the sort of thing which could cause a big breakout rally in GE stock.
General Electric Stock to $12?
General Electric stock today is dirt cheap.
The stock currently trades at 75% of its trailing sales base. Normally, the stock trades at 140% its trailing sales base. The presently depressed valuation is a function of the company’s presently depressed demand trends. But as those demand trends recover to normal levels over the next few quarters, GE’s valuation should similarly recover to normal levels.
This multiple expansion — coupled with bigger sales and profits on the back of better end-market demand — will drive GE’s stock price far higher in 2021.
How much higher?
On the basic assumptions that — by 2022 — GE’s sales and profit margins will rebound to 2019 levels, I see the company doing about 80 cents in earnings per share. Throw a typical industrials sector 15-times forward earnings multiple on that and you get a 2021 price target for GE of $12 per stock.
Bottom Line on GE Stock
Rising Covid-19 cases are a risk. But eventually, the coronavirus pandemic will abate. When it does, GE stock is optimally positioned to rip higher because the current management team has done everything right to stabilize this sinking ship and prep it for a new era of sustained growth.
Thus, if time is on your side, buying GE stock at today’s depressed levels seems like a smart move.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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