What’s Driving Growth For General Electric Stock?

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After a 14% fall year-to-date, at the current levels, we believe General Electric stock (NYSE: GE) has room for growth. GE stock fell from $96 in early January to $81 now. The YTD -14% return for GE marks an in-line performance with the broader S&P500 index, down 17%. Looking at the longer term, GE stock is up 40% from levels seen in late 2018, underperforming the S&P500 index, up around 65%. Our dashboard – Why General Electric (GE) Stock Moved – provides more details on the factors behind this move over the last four years.

This 40% rise for GE stock since late 2018 can be attributed to 1. the company’s P/S ratio, which grew 46% to 0.9x trailing revenues currently, from 0.6x in 2018, 2. a 19% decline in total shares outstanding to 786 million now, partly offset by 3. General Electric’s revenue falling 23% to $75 billion over the last twelve months, compared to $97 billion in 2018. A decline in revenue and shares outstanding has meant that the company’s revenue per share fell just 4.2% to $95.55 from $99.76 over the same period.

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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 $24.5 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. For the nine months ending September 2022, the Aviation sales were up a solid 21% y-o-y, while the segment profit surged 2x.

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 early 2023 and Energy in 2024, leaving the Aviation business with GE. The company has also managed to reduce its debt meaningfully to $38 billion currently, from $70 billion in 2020. High debt levels have also weighed on GE’s stock performance.

While the company has strong prospects, it faces headwinds from the challenging macroeconomic environment. There are fears of slowing economic growth given the high inflation and Fed action. Furthermore, General Electric faces headwinds from supply chain disruptions, which is expected to weigh on its near-term performance.

That said, with the dip in GE stock this year, it has more room for growth. We estimate General Electric’s valuation to be $92 per share, reflecting a 13% upside from its current market price of $81, implying that investors are likely to be better off buying GE stock for long-term gains. At its current levels, GE stock is trading at 0.9x the 2022 adjusted revenue estimate of $95.80 per share, compared to the last three-year average of over 1.2x, implying that the stock has more room for growth.

While GE stock looks like it can gain more, 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 at how counter-intuitive the stock valuation is for Honeywell vs. Amkor Technology.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 GE Return -5% -14% -67%
 S&P 500 Return -4% -17% 76%
 Trefis Multi-Strategy Portfolio -3% -20% 216%

[1] Month-to-date and year-to-date as of 12/12/2022
[2] Cumulative total returns since the end of 2016

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