American manufacturing icon General Electric (NYSE:GE) has had some good times and some rough patches in its long history. In recent years, GE stock owners have looked to CEO Larry Culp to steer the embattled company in the right direction.
Admittedly, it hasn’t been a smooth ride for shareholders. There was even a period in 2020 when the stock price reached its lowest point since the 2008 financial crisis.
Today, the pandemic continues to weigh on General Electric’s aviation business and other segments. Nevertheless, both the stock and the company are starting to show signs of life.
One measure of this name’s positive momentum is its free cash flow. Before we delve into that, however, let’s take a glance at the historical price action of the stock.
A Closer Look at GE Stock
Back in October of 2016, GE stock was actually doing quite well. After a strong bull run starting in 2009, the share price managed to exceed $30.
Unfortunately, though, the next couple of years became absolutely brutal for shareholders. By November of 2018, the price had tumbled to $7 and change. Incredibly, the situation got even worse after that.
Covid-19 couldn’t have come at a more inopportune time for General Electric. CEO Larry Culp had just made its aviation segment a major priority. Then the pandemic dealt a devastating blow to the aviation industry in general.
Consequently, GE stock dropped to a gut-wrenching low of $5.48 in March of last year. There’s been a comeback in the making since that time, though, with shares reaching $11 in December and holding that level over the past few months. As of this writing, GE sits at $11.44.
Accentuating the Positive
Sometimes in the financial markets, the best policy is to focus on the positive instead of fretting over problems.
This philosophy could be applied to recent data issued by General Electric. The company posted its fourth-quarter 2020 fiscal data on Jan. 26 of this year. To be honest, the news wasn’t all good.
More specifically, General Electric’s quarterly earnings per share declined by a whopping 62%. Furthermore, the company’s quarterly revenues declined by 16%.
Given those stats, you might be tempted to conclude that Culp and his company ended 2020 on a bad note. But thankfully, there’s also good news to report — and it might be enough to signal a long-term turnaround for GE stock.
Here’s what I’m referring to: during Q4 of 2020, the company generated $4.4 billion in industrial free cash flow. With that result, GE beat its own guidance.
Putting Concerns to Rest
Why is free cash flow so important to both Culp and General Electric’s reputation right now? Because free cash flow is a way to measure the health of the company’s operations and, importantly, it’s ability to pay down debts.
Undoubtedly, the pandemic contributed to General Electric’s suffering, with a cash outflow of $4.3 billion in the first half of the year. Despite that, though, the company managed to make a highly impressive $606 million in cash for full-year 2020.
Citing GE’s Q4 cash generation, analyst John Inch wrote, “Lingering liquidity concerns have now likely been put to rest.”
That might be a slight exaggeration — Culp and his company will need to keep the revenues coming in 2021. Still, it’s highly encouraging to witness General Electric moving out of the red and into the green when it comes to capital flow. That is a bright note for the future of GE stock.
The Bottom Line
CEO Larry Culp’s turnaround of General Electric isn’t going perfectly. Some of the company’s fiscal stats suggest that its troubles aren’t over yet.
Nevertheless, a strong improvement in the company’s cash flow indicates that there should be room for GE stock to run in 2021. So, don’t count GE out as an investment.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content -and crossed the occasional line -on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.