After a Solid Q3 and Q4 Guidance, It’s Time to Ride the GE Stock Wave

GE’s (NYSE:GE) strong third-quarter results and much better-than-expected Q4 guidance show that its CEO is successfully turning around the company. Moreover, demand for most of the conglomerate’s products is clearly rebounding, and GE stock remains very well-positioned for a huge post-vaccine rally.

Any Way You Look at GE Stock, It's Impossible to Suggest Buying Here

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GE’s Q3 EPS came in at 6 cents versus analysts’ average estimate of -3 cents. It reported Q3 revenue of $19.4 billion, compared with the mean outlook of $18.94 billion.

Importantly, GE’s closely watched industrial free cash flow metric was $514 million in Q3, versus -$2.1 billion in Q2. The cash flow of all of the company’s units rose versus the previous quarter, and GE provided Q4 and 2021 industrial free cash flow guidance of “at least $2.5B and positive,” respectively.

The GE Stock Turnaround

With his lean management techniques and spending cuts, GE CEO Larry Culp has clearly turned the company around. That’s one of the two key reasons why, despite the novel-coronavirus pandemic, GE is generating strong, positive industrial free cash flow, confounding the conglomerate’s many critics.

The other key factor behind GE’s better-than-expected results is improving demand for most of its products, even during the coronavirus pandemic. In Q3, the revenue of the conglomerate’s Power, Renewables, and Healthcare businesses all climbed year-over-year, excluding the impact of divestments and acquisitions.

GE’s orders fell 31% YOY to $15.5 billion, although they came in well above Q2’s $13.8 billion, and the lion’s share of the decline was caused by the pandemic’s effect on its Aviation unit, along with timing issues.

GE’s backlog remains huge, at $384 billion, and 80% of the backlog is comprised of services which carry relatively high margins.

Every Main Industrial Unit Is Improving

The company’s Gas Power unit, in-line with my previous predictions about the strength of natural gas, is doing very well. Its revenue jumped 7% YOY, and Culp said that the division’s “strong pipeline” should result in “better equipment orders in” Q4.

In Renewables, Culp told CNBC on Oct. 28 that the unit’s new Haliade offshore wind turbine is “a multi-year story in the making,” with ensure at record volumes.

Indicating that Culp expects both Power and Renewables to generate positive free cash flow next year, the CEO told CNBC Renewables and Power were significant factors that would drive positive free cash flow in 2021.

The CEO added that the “turnaround in both Power and Renewables is gathering momentum,” while the wind turbine business and Renewables in general are showing “signs of traction.” And Power’s margins, excluding acquisitions and divestments, climbed seven percentage points YOY, while the same metric came in two percentage points higher at Renewables.

For his part, CNBC’s Jim Cramer stated that “Power and Renewables no longer seem to be the weak sister to your company.”

Meanwhile, Healthcare’s orders jumped 10% YOY, excluding acquisitions and divestments, and its profit jumped 30% YOY to $800 million.

In the midst of the pandemic, Aviation delivered a $400 million profit in Q3, while its revenue slid a better-than-might-be-expected 39% YOY. And Culp reported that the number of departures of planes with the company’s engines improved in Q3.

Plane departures in China are just below January levels, while departures in the Americas were higher in October than July, Culp reported. In Europe, however, departures fell in Q3 compared with the previous quarter.

GE Remains Poised to Benefit From a Vaccine

As I’ve noted in previous columns, I expect GE stock to get a huge boost from the launch of a vaccine for the coronavirus, given the size and potentially huge profitability of its Aviation business.

In a recent note to investors issued after GE released its Q3 results, Goldman Sachs reiterated that it agreed with that assessment. The firm thinks the conglomerate’s 2021 free cash flow can exceed its minimum $2.5 billion guidance. Goldman raised its price target on the shares to $11 from $10 and kept a “buy” rating on the name.

The Bottom Line on GE Stock

As I previously predicted, GE’s Power and Renewables businesses have made a big comeback, and they look poised to improve further going forward.  Meanwhile, Aviation and GE stock should surge tremendously next year following the mass distribution of a vaccine.

With the shares still greatly undervalued due to largely baseless fears, I continue to recommend that longer-term investors buy the name.

On the date of publication, Larry Ramer held a long position in GE. 

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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