General Electric (NYSE:GE) is set to make a classic turnaround. It is poised to make a major turnaround. As result, GE stock is likely to move significantly higher over the next year. Hang on, and catch the ride if you are willing.
Some of that turnaround can already be seen in GE stock. It is up 39% in the last month and more than 40% in the last six months. Incredibly, year-to-date, the stock is almost breakeven, down just 2.5%.
Moreover, GE stock is still cheap from a valuation standpoint. For example, its analysts expect to see 37 cents in earnings per share (EPS) for 2021. That puts GE stock on a forward multiple of 29 times earnings.
Bargain Stock and Analyst Estimates
But estimates for 2022 are now at 56 cents per share, according to Marketwatch.com. This gives GE stock a forward multiple of just 19 times earnings.
That makes GE looks like a bargain, especially if earnings estimates turn around even more than expected. I wrote about this last month in my article on General Electric. For one, the company believes it will be cash-flow positive next year.
Moreover, now that the 737-Max jet has been approved for commercial service in the U.S., General Electric can begin ramping up production. It makes the engines for the 737-Max jet.
In addition, analysts are turning positive on the company’s healthcare division. Bank of America analyst Andrew Obin raised his price target to $13 per share. This was partly based on higher volumes in its pharma and ventilators and medical monitors business.
Yahoo Finance reports that there are five analysts with strong “buy” recommendations on GE stock. Their average price target is $9.71, with a high of $13. At the high, the stock represents a potential gain of about 20% from the Dec. 7 of $10.86 per share.
More importantly, GE forecasts that it will make $2.5 billion in industrial free cash flow (FCF) in Q4. More importantly General Electric forecast that in 2021 free cash flow will be positive for the whole year.
What General Electric Is Worth
Let’s assume that General Electric can make $2.5 billion in FCF in Q4. That works out to a $10 billion annualized rate. To be conservative, let’s say that in 2021 it is just $8 billion, but moves up to $12 billion by 2022.
Now if the market values the FCF with a yield of 4% GE stock would be worth $200 billion (i.e., $8 billion divided by 4% equals $200 billion). That would be more than 100% higher than GE stock’s present $95 billion market capitalization.
Even if the market valued the FCF at just 5%, the market cap would be $160 billion, or 68% higher than today. That means GE stock is worth between $18.24 per share to $21.72. So, on average its value is $20 per share.
Even if it takes two years for that price target to be hit, the forecast return is 41.4% each year on a compound basis. That represents a great ROI for most investors.
What to Do With GE Stock
Barron’s reports that analysts are now turning more positive on GE stock. They say that is why the stock is rising. Another reason for the jump in price is better than expected earnings.
Barron’s also thinks that a solid fourth-quarter earnings report and more analysts reports on GE stock will help move it higher.
Recent moves by the company to cut expenses in its aviation unit by reducing its workforce there may help the company reach its earnings goals.
Therefore, the astute investor will look to take a position now, especially given that there seems to be a good probability GE stock will spike.
For example, even if there is just a 50% probability that it doubles in two years, that still gives the investor a 50% expected return over that period. Over two years that provides investors an annual compound return of 22.5% each year for two years. That is a great risk-adjusted ROI for most investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
