General Electric (NYSE:GE) is likely in the middle of a turnaround, given that a number of its business lines are starting to get a post-Covid boost. Therefore, I suspect its second quarter earnings and free cash flow (FCF) will see a significant jump. This could have a big effect on GE stock.
When I wrote about General Electric in May, I said the stock was worth at least $17 per share. I now think it could be worth much more. I estimate that GE stock could see an upside of almost 50% from its July 21 price of $13.09, or $19.54 per share.
What GE Stock Is Worth
I based my last price target on the company’s statement that it expects industrial FCF to range between $2.5 billion and $4.5 billion. I now think its FCF could reach about $6 billion since analysts tracked by Seeking Alpha expect 2022 revenue will rise to $81.87 billion. This implies that its FCF margin will rise to about 7.3%.
Using a 3.5% FCF yield, we can estimate that the market value will rise to $171.4 billion. That is 49.3% over its current market capitalization of $114.82 billion. In other words, GE stock is worth about $19.54, or 49.3% more than its price of $13.09 on July 21.
But keep in mind that we will have to change these estimates once the company comes out with its Q2 earnings. This will also affect the company’s industrial FCF outlook and our estimate for 2022 FCF. However, I still think my estimate of $6 billion in FCF for 2022 will likely occur.
Expect to see analysts slowly raise their revenue and FCF targets for the company as a result.
What Analysts Think About General Electric
Yahoo! Finance analysts now predict revenue for Q2 will reach $18.13 billion, compared to $17.75 billion last year. That represents a potential increase of 2.1%. However, analysts now think the company will post 4 cents in earnings per share (EPS) for Q2 versus a loss of 15 cents last year.
Moreover, 15 of those same analysts estimate the stock has a value of $14.97 per share. That is 14.5% over GE stock’s July 21 price. TipRanks.com has a similar price target from 12 analysts. Their average price target is just $14.10 per share. The same is true with Seeking Alpha’s survey of 20 analysts on GE stock. Their average price target is $14.39.
Additionally, Barron’s magazine argues that GE stock is lackluster because the market is pricing in a “Covid recession.” They think industrial stocks like GE are accounting for a potential Covid-19 resurgence in fall or winter and a subsequent economic decline.
I think that is a pretty dim view of the situation. It also seems to make no difference between the price of a stock and its underlying value.
What To Do With GE Stock
Right now, GE stock barely pays a dividend. It is just 4 cents per year, giving the stock a dividend yield of just 0.3%. So no one is buying GE stock for its dividend yield.
On the other hand, even if a new recession emerges, the stock already seems to be fairly cheap. On July 21, it was trading at just 1.45 times forecast sales for 2021 and 1.36 times predicted 2022 sales.
But based on my calculations, GE stock is still worth buying since it will likely be FCF positive next year. And that could raise its target value to $19.54 per share, almost 50% higher.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.