After a 33% fall year-to-date, at the current levels, we believe General Electric stock (NYSE: GE) now looks undervalued. GE stock fell from $96 in early January to $65 now. The YTD -33% return for GE marks an underperformance with -22% returns for the broader S&P500 index.
Looking at the longer term, GE stock is down 26% from levels seen in late 2019. This marks an underperformance compared to some of its peers and the broader markets, with Honeywell stock rising 1%, 3M stock down 27%, and the S&P 500 index rising 16% over the same period. Our dashboard – Why General Electric (GE) Stock Moved – provides more details on the factors behind this move over the last three years.
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This 26% fall for GE stock over the last three years can be attributed to 1. the company’s P/S ratio, which fell 14% to 0.9x currently, from 1.1x in 2019, 2. an 18% decline in General Electric revenue to $74 billion currently, compared to $90 billion in 2019, and 3. its shares outstanding rising 5% to 1.1 billion over this period. This has meant that the company’s revenue per share fell 22% to $70.46 from $90.42.
The revenue decline can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially Aviation, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis, which has weighed on the company’s overall performance since the beginning of the pandemic. Aviation sales of $21.3 billion over the last twelve months compared with $32.9 billion in 2019, before the pandemic. The company’s other businesses – Healthcare, Renewable Energy, and Power, also saw their sales decline during the pandemic.
Now, with the worst of the pandemic likely behind us, the economies have seen a recovery, and airlines are benefiting from a rebound in travel demand. This should result in an uptick in the company’s Aviation business over the coming years. As of Q1 2022, the Aviation sales were up 12%, while the segment profit was up a solid 42% y-o-y.
General Electric is in the process of its planned split into three different companies focused on Aviation, Healthcare, and Energy. The Healthcare business is expected to split in 2023 and Energy in 2024, leaving the Aviation business with GE. The company has also managed to reduce its debt meaningfully to $33 billion currently, from $70 billion in 2020. High levels of debt has also weighed on GE stock performance in the past.
While the company has strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. Furthermore, General Electric faces headwinds from supply chain disruptions, which is expected to weigh on its near-term performance.
That said, with the recent dip in GE stock, we now find it undervalued, trading at about 21x forward expected earnings. This is a low multiple compared to the 36x average of the last two years. We have a $101 per share valuation, reflecting a significant 56% upside from its current market price of $65, implying that investors may be better off using the recent dip to enter GE stock for gains in the long run. See our analysis on General Electric Valuation: Is GE Stock Expensive Or Cheap? for more details on GE’s valuation and how it compares with peers.
While GE stock looks undervalued, it is helpful to see how General Electric’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs. Amkor Technology.
|S&P 500 Return||0%||-22%||84%|
|Trefis Multi-Strategy Portfolio||-9%||-26%||190%|
 Month-to-date and year-to-date as of 6/23/2022
 Cumulative total returns since the end of 2016