General Electric (NYSE:GE) stock is on the mend. The company recently reported encouraging second-quarter results.
Meanwhile, demand for airline flights and airplanes continues to rebound, and Congress looks poised to pass two bills that should greatly benefit GE.
Given these points, I remain very bullish on GE stock.
Among the factors holding down the shares are the continued bearishness of JPMorgan (NYSE:JPM) analyst Stephen Tusa, worries about the Delta variant of the novel coronavirus, and concerns about whether Congress will pass the infrastructure and budget bills that it’s considering.
All of these fears, however, are likely to prove to be baseless.
Q2 Results and GE Stock
Excluding acquisitions, GE’s Q2 orders jumped 30% year-over-year (YOY) and 7% versus Q1, while its revenue from services soared 50% YOY. Moreover, on GE’s Q2 earnings conference call, CEO Larry Culp reported that the conglomerate’s healthcare, Renewables, and Power Services businesses had generated sales similar or better than 2019.
The conglomerate’s industrial free cash flow jumped by $2 billion YOY, and GE expects its 2021 industrial free cash flow to be $3.5 billion-$5 billion, up from its previous outlook of $2.5 billion-$4.5 billion. GE’s industrial profit margin jumped ten percentage points YOY.
Moreover, the Power unit’s services revenue surged 15% YOY, while the sales of its aviation Commercial Services business climbed 50% YOY. The revenue of its Healthcare and Gas Power units rose above 2019 levels, as Gas Power continued to prove its naysayers wrong.
Aviation’s orders came in above management’s outlook, and the unit’s sales rose 10% YOY. Excluding one contract loss, the unit’s margins would have climbed at least 10% YOY.
The Healthcare unit’s orders rose an extraordinary 20% YOY, excluding last year’s ventilator sales. The Renewable unit’s sales climbed 9% YOY, and the company expects the segment’s equipment orders to increase significantly versus the first six months of the year, CFO Carolina Dybeck Happe said.
Aviation’s Outlook Continues To Rebound
Culp said that the fundamentals of the global aviation sector are improving, citing a sizeable uptick in departures this quarter, with even greater momentum in June and July.
“Shop visit volume and scope improved slightly sequentially,” he added. “We anticipate continued sequential volume growth and scope expansion through the year.”
GE continues to expect plane departures to climb 20% in 2021 and come in 30% below 2019 levels, Culp noted.
Further, sizable green shoots continue to emerge across the Aviation sector. For example, Airbus (OTC:EADSY) delivered 47 planes last month, China has begun auditioning Boeing’s (NYSE:BA) 737 MAX plane, Delta (NYSE:DAL) bought 29 used Boeing planes, and Alaska Air (NYSE:ALK) ordered 12 737 MAX planes.
This data suggests that the Delta variant is not preventing consumers from flying.
Fears Are Overdone
In the wake of GE’s Q2 results, JPMorgan’s Tusa, who has remained bearish on GE stock even as the shares nearly doubled since December 2018 and more than doubled since May 2020, unsurprisingly remained downbeat on the name.
He kept a $40 price target on GE, versus its current level of about $100.
As a key reason for his bearishness, Tusa cited the industrial free cash flow estimates that the conglomerate used to account for its decision to end a practice called factoring as of April. Factoring refers to the longtime practice of GE’s industrial units of selling their accounts receivables, i.e. the money that they’re owed by their customers.
Tusa questioned whether the free cash flow estimates that GE used are realistic, calling them “detached from reality and backward-looking.” Under Culp, however, I’ve always found GE’s financial reporting to be straightforward and accurate.
Additionally, I assume that GE’s estimates were based on the amounts for which it’s previously sold its account receivables and/or the proportion of its account receivables that it’s been able to convert into revenue in the past.
Since, many large healthcare companies, major electric utilities, and established airlines are not in major financial distress, I don’t think there’s any reason to doubt that the conglomerate’s estimates are realistic.
As far as the Congressional bills are concerned, I believe that the two factions of the Democratic Party that are currently arguing about them have every reason to come to an agreement.
With Congressional elections, a little more than a year away and control over both houses at stake, Democrats’ prospects have taken a hit due to worries about inflation, the coronavirus, and immigration.
I’m convinced that Congressional Democrats badly want achievements that can counteract these issues. Clearly, the two bills represent their best chance of attaining such achievements.
Since the infrastructure bill would greatly boost spending on the electrical grid and the budget includes a great deal of spending on renewable energy, GE and GE stock should get big boosts from both pieces of legislation.
The Bottom Line on GE Stock
GE reported impressive Q2 results, and its outlook is strong. Yet GE’s split-adjusted stock price is down about 10% since its May peak on overdone worries, creating a good buying opportunity for long-term investors.
On the date of publication, Larry Ramer held a long position in GE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.