General Electric (NYSE:GE) stock has spent quite a bit of time in the penalty box. No one has wanted to touch this classic name after it turned toxic, with GE stock down near multi-year lows. Can anyone blame those investors though?
General Electric is not the blue-chip wonder it once was. Back in the day, GE was a towering industrial giant. It had its hands in multiple industries as it leveraged its size to outmuscle its peers.
Then, slowly but surely, poor management, accumulated debt and increasing competition put the squeeze on GE. Shareholders took notice too, particularly when JPMorgan’s Stephen Tusa waved the red flag on GE stock in 2016. That was long before the market took Tusa’s caution seriously, though.
In the years following, Tusa had continued to cut his price target, consistently ahead of the market and his fellow analysts.
His research was good — arguably, too good — as GE’s market capitalization plunged from $248 billion at the beginning of 2017 to around $53 billion as recently as this September.
Is GE’s curse set to lift?
Examining General Electric
Tusa might have been nailing GE left and right, but quite frankly, it deserved to be. With or without Tusa, GE stock would have been in trouble. The market eventually sniffs these things out.
Particularly when it comes to cash flow, balance sheets and pension funds. Of course, it didn’t help that the novel coronavirus came sweeping through. Nor did Boeing’s (NYSE:BA) issues with its 737 MAX help.
On the plus side, it has made GE into a solid recovery play. How so? Aside from its other businesses, a rebound in aerospace (and with the 737 MAX recently receiving clearance), General Electric’s largest business — aerospace — should see a healthy return to growth in 2021 and 2022.
In the most recent Q3 earnings report, GE made one massive improvement. That came down to cash flow. Industrial free cash flow came in at $514 million. That’s after recording deficits of $2.1 billion in the prior quarter and $2.2 billion in Q1.
Management indicated the situation will continue to improve, too. They expect industrial free cash flow of “at least” $2.5 billion in Q4 and positive results in 2021.
Obviously the company has not been made whole on the free cash flow front this year and GE still faces many negatives. For instance, revenue, orders and earnings all fell vs. the same quarter a year ago. General Electric’s business is improving and the perception that it will continue to improve is driving the stock price higher.
As for Tusa, he’s changed his tune a bit too. In regards to the Q3 results, he said that a headline like that “is tough to argue with” and that, “it is what it is, positive.” In September, ahead of the results, Tusa upgraded the stock to neutral but pulled his price target.
Bottom Line on GE Stock
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While the company is still experiencing plenty of headwinds, investors have opted to take the better-than-expected Q3 results and combine them with an optimistic view of the world.
That view is that the global economy will improve in 2021. The hope, obviously, is that it will — not just for GE’s sake.
With Covid-19 vaccines rolling out, investors will look for airline traffic to rebound. That’s particularly true for the second half of 2021. Even though there will likely be a lag in airline orders for new planes (and thus GE’s engines), an uptick will be a positive vs. 2020.
Orders fell by double digits in four of GE’s five business segments. The other segment — GE capital — doesn’t have orders. So effectively, orders shrank considerably last quarter. In its largest unit, Aviation, orders fell 54% year over year, while segment profit plunged 79%.
However, this area is likely to see a return to action in 2021. At the very least, it shouldn’t decline. And these improvements, while baby steps, are a big improvement for GE and thus GE stock is flying.
As for where it can go, GE continues to ride its short-term moving averages higher. If it can continue to do so, $12 to $13 may not be far off, as well as a tag of the 200-week moving average. On a pullback, see how GE stock handles a test of its 10-week moving average.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
