Is It The Right Time To Buy General Electric After A 50% Fall In 2020?

by Trefis Team
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General Electric’s stock (NYSE:GE) has seen a whopping 50% decline since the beginning of this year, significantly underperforming broader markets, with the S&P down around 12%. The company has a high exposure to the aviation industry, which has been the worst hit in the current COVID-19 crisis. That said, we think that the stock is undervalued at this point, considering that it is also down 25% from levels seen in early 2019, a little over a year ago. Our dashboard ‘Why General Electric moved -25%?‘ provides the key numbers behind our thinking, and we explain more below.

General Electric Stock Was Up 54% In 2019, Led By Double-Digit Earnings Growth

While General Electric’s Revenues were down 1.9% between 2018 and 2019, declining from around $97.0 billion to $95.2 billion, the company’s reported Adjusted Net Income grew 15% from around $4.9 billion to around $5.7 billion, driven by an expansion of net margins from around 5.1% to 6.0%. Margin expansion aided the earnings growth, which on a per-share basis was up 14.4%, despite a marginal expansion of share count by about 0.5% to 8.74 billion. Overall, the improvement in General Electric’s stock price has come from the expansion of its earnings as well as P/E multiple, which grew 28.3% from 13.4x in 2018 to 17.2x in 2019.

Looking at 2020, thus far, General Electric’s P/E multiple has seen a decline of 49% to 8.8x. While General Electric’s revenue and earnings are expected to take a sharp hit in 2020, the decline in the stock price appears to be very fast, and the stock could see strong growth, given its P/E multiple has already declined meaningfully over the recent months.

Why The Stock Price Could Grow & What’s The Likely Trigger?

The global spread of Coronavirus has meant that people were increasingly staying home and avoiding traveling. For now, several governments across the globe have put travel restrictions in place in order to contain the spread of virus. As such, the airline industry has taken a massive hit. For General Electric, one-third of its revenue comes from the Aviation segment. The company designs, produces, sells and services jet engines, turboprop and turbo shaft engines, and related replacement parts for use in military and commercial aircraft. It also provides maintenance, component repair and overhaul services (MRO), including sales of replacement parts for engines and repair and overhaul of engines manufactured by competitors. This business is expected to take a significant hit, also. But the question really is, is General Electric a good bet at these levels? We think it is. As of early May, the economy has been gradually opening up and commercial and passenger travel should pick up over the coming months. The consensus revenues estimate for 2020 and 2021 is $79.6 billion and $83.5 billion, respectively. Now, at the current price of $5.70, General Electric is trading at 0.63x 2020 and 0.60x 2021 revenues, as compared to 0.68x seen in 2018, and 1.03x seen in 2019. These levels could potentially cause investors to re-examine the company’s valuation.

Are Work From Home stocks a better way to play the coronavirus market compared to healthcare? View our indicative theme on Work And Learn-From-Home Stocks for more details on key WFH stocks and their returns.

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