I hate to pile on Jack Welch, but the consensus opinion seems to be that industrial giant General Electric (NYSE:GE) lost its mojo during Welch’s tenure as chairman and CEO. As a result, long-term GE stock investors are still trying to get back to break-even.
Some of General Electric’s stakeholders are counting on current Chairman and CEO Larry Culp to put the company back on the right path towards consistent profitability.
The onset of the novel coronavirus certainly didn’t make things easier for Culp. Yet, as the nation gradually recovers, General Electric’s re-focus and re-prioritization seem to be helping the company to get back on track.
Make no mistake – General Electric will continue to be a “show-me” story for quite a while. A recently released fiscal outlook for 2021, however, suggests that the story might have a happy ending.
A Closer Look at GE Stock
It’s perfectly fine for the shareholders to celebrate the rally in GE stock over the past year.
From April 2020 to April 2021, the share price has literally doubled. Yet, the uptrend didn’t start in earnest until late September of last year.
At that time, GE stock was barely above $6. But after an astounding multi-month rally, the shares landed just below $13 as of midday April 20, 2021.
I said it’s fine to celebrate, but this is no time to get complacent. On a long-term basis, shareholders are still struggling. As recently as October 2016, the stock price was above $30 – and in the summer of 2000, it was above $55.
The point is that bulls still have a lot of ground to cover. In their favor, though, is GE stock’s reasonable valuation. Specifically, the stock has a trailing 12-month price-to-earnings ratio of 22.41, which is fairly low.
So, even after the share-price run-up, there’s plenty of room for the bulls to continue the rally in 2021.
Streamlining for Success
As InvestorPlace contributor Chris MacDonald suggested, years of empire-building under Welch caused General Electric to become huge, unwieldy and saddled with debt.
Culp is clearly trying to change this. In effect, he’s putting General Electric on a weight-loss program while shifting the company’s focus towards future-facing economic sectors.
Indeed, in a recently released, highly detailed 2021 outlook press release, Culp explained that his company is now “scaling lean” while transforming into “a more focused, simpler, and stronger industrial company.”
Culp specifically mentioned “sustainable, reliable, and affordable energy” as one of the company’s chief priorities.
That should be highly encouraging to anyone who’s worried that General Electric would remain mired in the past.
For the company to survive and thrive in the coming years, a move away from appliance manufacturing into sustainable energy will be not just desirable, but necessary.
A Brighter Future
The company’s re-focusing is all fine and good, but will it lead to an improved bottom line for General Electric?
If we’re to believe the company’s full-year 2021 outlook, the answer is definitely yes. Here’s the breakdown:
- Industrial segment revenues are expected to grow organically in the low-single-digit range.
- Adjusted GE Industrial profit margin should expand organically by 250 or more basis points.
- The company’s modeling adjusted earnings per share of 15 to 25 cents.
- GE Industrial’s free cash flow should be in the range of $2.5 billion to $4.5 billion.
Again, streamlining is the key here. As the press release points out, these results will reflect on General Electric’s having disposed of certain businesses last year, and primarily the biopharmaceutical segment.
The Bottom Line
All in all, Culp asserts that General Electric remains on “a positive trajectory in 2021.”
I’m hoping that this is true. General Electric is still an American icon. And, Culp’s plan for a slimmer, more focused company is precisely what General Electric needs now.
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.