General Electric Stock Can See Higher Levels Led By Aviation Growth

by Trefis Team
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We believe that General Electric stock (NYSE: GE) may be a good buying opportunity at the present time. GE stock trades near $10 currently and it is, in fact, down 13% so far this year (from $11 at the beginning of 2020). It traded at $13 in February 2020 – just before the coronavirus pandemic hit the world – and is currently 23% below that level as well. GE stock has rallied over 59% since its March lows of $6, in-line with the S&P 500 which gained about 59%. The stock price was also aided by better than expected Q3 performance led by renewable energy and power segments. Now with economies opening up, and resumption of Boeing 737 MAX aircraft production, GE can look forward to faster recovery for its aviation business, driving the stock higher from here, in our view. Our conclusion is based on our comparative analysis of General Electric stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how GE stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

GE and S&P 500 Performance Over 2007-08 Financial Crisis

GE stock declined from levels of about $40 in September 2007 (pre-crisis peak) to levels of $8 in March 2009 (as the markets bottomed out), implying GE stock lost 80%. It recovered post the 2008 crisis, rallying a strong 78% to levels of $14 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

General Electric Company Fundamentals Over Recent Years Have Been Lackluster

General Electric revenues decreased from $117 billion in 2015 to $95 billion in 2019, due to multiple divestments, including GE Healthcare and Baker Hughes. The company has been posting losses over the recent years and on a per share basis losses amounted to $0.62 in 2019. More recently, the company’s Q3 revenues saw a 17% y-o-y decline due to the impact of the pandemic on the company’s business. The company reported earnings of $0.06 on a per share and adjusted basis, compared to $0.15 in the prior year quarter.

Does General Electric Company Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

General Electric’s total debt decreased from $136 billion in 2016 to $79 billion at the end of Q3 2020, while its total cash came down from $49 billion to $39 billion over the same period. General Electric utilized $37 million cash from operations in the first nine months of 2020, compared to over $2 billion cash generated from operations in the prior year period. While the company’s debt levels are high, it does have a strong cash balance of $39 billion and another $47 billion in investments. As such, the company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in revenue toward the end of 2020, followed by revenue growth in 2021, boding well for the GE stock in the near term.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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