Here’s Why General Electric Stock Has More Upside

by Trefis Team
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[Updated: 7/9/2021] GE Stock Update

We believe that the stock price of General Electric (NYSE: GE) has more room for growth from its current levels of $13. GE stock is up over 2x from the levels of around $6 it was at on March 23, 2020, when the broader markets made a bottom. This marks a slight outperformance compared to the S&P 500 which grew 93% over the same period. The outperformance of GE stock can primarily be attributed to expectation of a quicker rebound in air travel, as well as the company’s focus on reducing its debt.

Looking at a longer time period, GE stock is up 77% from the levels of around $7 seen toward the end of 2018, in-line with the S&P 500 rise of nearly 74%. Much of this growth over the recent years can be attributed to favorable changes in its P/S multiple.  General Electric’s total revenue declined 21% to $76.2 billion over the last twelve month period, compared to $97.0 billion in 2018. Most of this revenue decline can be attributed to lower sales in the Aviation segment, as air travel was hit hard during the pandemic, and in-turn, lower demand for GE’s engines.  Also, the company saw a modest 0.5% decline in total shares outstanding since 2018.

As such, on a per share basis, General Electric’s revenue declined 21% to $8.98 for the last twelve month period, compared to $11.37 in 2018. Despite a 21% fall in RPS since 2018, General Electric’s P/S multiple has risen a large 118% to 1.4x currently, compared to levels of 0.7x seen in 2018. Our dashboard, ‘What Factors Drove 77% Change In General Electric Stock between 2018 and now?‘, has the underlying numbers.

Outlook

General Electric’s aviation business has seen more profound impact of the Covid-19 pandemic, compared to its other segments. Aviation revenues were down 33% y-o-y in 2020, compared to only a 6% drop in Power, 10% fall in Healthcare, and a 2% growth in Renewable Energy segments. This can primarily be attributed to the impact of the pandemic on air travel.

That said, there has been some positive developments that have helped GE stock over the recent months. Airbus  plans to accelerate its production of aircraft in 2022, while Boeing plans to accelerate its production of 737 MAX by over 60% to 42 aircraft a month by fall 2022, compared to 26 aircraft per month by the end of 2021. Recently, United Airlines announced an additional 200 plane order of Boeing 737 MAX aircraft, raising hopes of a quick rebound in travel demand and alleviating concerns regarding MAX’s manufacturing shortcomings. This will result in better revenue growth for GE over the coming years.

Other than a Covid-19 recovery play, GE stock also stands to benefit from its focus on reducing its debt. GE’s current debt of around $71 billion compares with a whopping $134 billion figure seen in 2018. The company has sold several of its assets to reduce its debt, and it continues to be on that path. While the company’s debt will remain around $70 billion in 2021, it is likely to see a meaningful decline over the coming years, led by an expected increase in cash flows from its aviation business, and from its shareholding in other companies, including Baker Hughes and AerCap. As such, we believe that GE stock has more room for growth in the near term.

 

[Updated: 6/2/2021] GE Stock Rise

The stock price of General Electric (NYSE: GE) has seen a 7% rise over the last five trading days, and we believe the stock will likely continue to rally in the near term. The 7% rise can primarily be attributed to the announcement of Airbus accelerating the production of A220 and A350 aircraft in 2022. Boeing is also rumored to accelerate the production of 737 MAX aircraft.  General Electric’s Aviation segment, which is involved in making aircraft engines, will benefit from an increase in production of aircraft. It is also the largest segment for the company, accounting for over a quarter of the company’s total sales. The company also plans to retire its notes worth $2 billion to strengthen its balance sheet. GE stock was buoyed by these developments.

Looking at the recent rally, the 7% rise for GE stock over the last five days compares with a 1.2% growth seen in the broader S&P 500 index. Now that GE stock has seen a rise of 7% in five trading days, can it continue its upward trajectory, or is a decline imminent? Going by historical performance, there is roughly an equal chance of a rise or fall in GE stock over the next month. Out of 140 instances in the last ten years that General Electric stock saw a five-day rise of 7% or more, 73 of them resulted in GE stock rising over the subsequent one month period (twenty-one trading days). This historical pattern reflects 73 out of 140, or about 52% chance of gain in GE stock over the coming month. See our analysis on General Electric Stock Chances of Rise for more details.

That said, given the current momentum in GE stock, and opening up of economies sooner than expected, and the rise of the vaccination rate, this means that the demand for air travel will likely see a sharp rebound earlier than estimated. This will likely result in continued growth in GE stock in the near term. If Boeing confirms the hike in production, that will be another positive trigger for GE stock.

Five Days: GE 7%, vs. S&P500 1.2%; Outperformed market

(6% likelihood event)

  • General Electric stock rose 7.0% over a 5-day trading period ending 6/1/2021, compared to the broader market (S&P500) rise of 1.2%
  • A change of 7% or more over 5 trading days is a 6% likelihood event, which has occurred 143 times out of 2516 in the last 10 years

Ten Days: GE 6.7%, vs. S&P500 0.8%; Outperformed market

(10% likelihood event)

  • General Electric stock rose 6.7% over the last ten trading days (two weeks), compared to the broader market (S&P500) rise of 0.8%
  • A change of 6.7% or more over ten trading days is a 10% likelihood event, which has occurred 260 times out of 2511 in the last ten years

Twenty-One Days: GE 7.9%, vs. S&P500 -0.1%; Outperformed market

(13% likelihood event)

  • General Electric stock rose 7.9% the last twenty-one trading days (one month), compared to the broader market (S&P500) decline of 0.1%
  • A change of 7.9% or more over twenty-one trading days is a 13% likelihood event, which has occurred 335 times out of 2500 in the last ten years

While GE stock looks like it can gain more, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs. Roper Industries

See all Trefis Price Estimates and Download Trefis Data here

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