Since late September, General Electric (NYSE:GE) stock has posted sizzling gains. Consider that the shares have gone from $6 to $11.61, bringing the market capitalization to $101 billion. And this has been more than just about the overall bullishness in the markets. GE has been benefiting from true fundamental improvements in the company.
Granted, GE stock is still well below the $30 level it traded at about five years ago. But then again, when the restructuring started, the company was in a mess. There was a need for a lot of heavy lifting.
OK then, after such a big move in the stock, it’s normal for there to be some consolidation. But I think this may prove to be temporary. Why so? Well, the most recent earnings report provides some big reasons for this.
Let’s take a look.
During the past few years, GE has had to undertake a painful restructuring, which has resulted in the loss of thousands of jobs. There has also been various unloading of divisions.
But the result is that the core operations have shown much improvement. In the quarter, operating cash flows came to $4.4 billion, which was a nice surprise for Wall Street. There were also positive cash flows for the full year, which happened a year before GE’s own forecast.
Cutting costs is always risky, though. There is the potential of sacrificing long-term projects or weakening critical parts of the business.
But it’s important to keep in mind that GE CEO Larry Culp is a proven leader. When he was at the helm of Danaher (NYSE:DHR) from 2000 to 2014, he was able to produce a gain of 5x for shareholders. He was strategic with his acquisitions and capital allocation.
But another critical part of his approach was a laser focus on constantly improving processes. He applied the manufacturing approaches of Toyota (NYSE:TM) – known as “lean” – for optimizing for low costs and high quality.
So, for a complex organization like GE, Culp’s abilities for process improvement have been much needed. They have essentially allowed for outsized gains in productivity. Even more impressive is that Culp has been able to show strong results despite the disruptions from the Covid-19 pandemic, which have been significant.
In the meantime, there has been the benefit of a rebound in the power and renewable energy businesses. With the moves toward clean policies and even the election of President Joe Biden, there is likely to be a secular growth trend for this market. And GE is nicely positioned. In the quarter, there was a notable pick-up in large orders.
Of course, GE still has its nagging issues as well. For example, the company has a massive debt load, which is at $37 billion. The growing cash flows and infusions from several spin-offs have helped to cut this down. But it will take more time to get the debt to better levels.
Although perhaps the biggest issue is with the jet business. Boeing (NYSE:BA) has continued to struggle and there will probably be several years until business travel makes a comeback. But Culp has been aggressive in realigning the jet division for the new realities.
Bottom Line on GE Stock
For the current year, GE is forecasting cash flows to range from $2.5 billion to $4.5 billion. Yes, this is a big gap. But there remains uncertainty with the jet business. Yet Culp is known for being conservative.
Thus, if he continues to execute on his plan – which seems like a pretty good bet – the cash flows may wind up being better this year too. And given the megatrend of clean energy, GE may wind up becoming an interesting growth story. In other words, the stock still looks attractive, even with the run-up.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.