Source: PaxForex Premium Analytics Portal, Fundamental Insight
Goldman Sachs analyst Joe Ritchie recently called General Electric stock a perfect option and set a $16 price mark on it. That was good news for investors, given that the stock closed Wednesday's trading at $12.98, but is such an optimistic vision explained? Let's take a look at a few of the premises Ritchie made and see if they stand up to thorough examination.
Listed below are some key points of the forecast for stocks made by the Goldman Sachs analyst and others:
- GE's free cash flow (FCF) generation will enhance considerably over the next few years and beyond.
- GE relies heavily on economic recovery, and global growth is gaining momentum.
- The company can also help itself by managing its businesses better, and CEO Larry Culp is on his way to boost the company's results.
We think all of these arguments are good, and we agree that GE as a business will be in much better shape in a few years. And here's why.
First, it's FCF.
Culp believes GE is on track to achieve high single-digit FCF margins and revenues in the $85 billion to $90 billion range by 2023, a combination that could result in FCF of $7 billion. Based on a recent market value of $117.5 billion, GE would trade at about 16.8 times FCF in 2023, which is an attractive valuation.
Based on his comments on all four industry segments, Culp's goal looks reasonable. The theory is that aviation will recover in line with the trend of commercial flights to 2019 levels by 2023, allowing GE Aviation to return to segment profits of $6 billion. Moreover, for GE Healthcare, Culp expects a combination of low- to mid-single-digit percentage revenue growth and significant margin expansion that will drive this segment's profit from $2.7 billion in 2020 to $3 billion to $4 billion by 2023.
Meanwhile, Culp's $1 billion to $2 billion profit expectations for GE Power look reasonable because they imply that the segment will achieve the high single-digit profit percentage that its peer, Siemens Energy, is aiming for in its energy business in 2023. Culp did not give a figure for GE Renewable Energy, saying only that it would be profitable in 2023. That's understandable, given the division's focus on boosting revenues from its offshore wind business from $200 million in 2020 to $3 billion by 2024, as well as improving the efficiency of its onshore wind business and turning around troubled grid solutions and hydropower businesses.
All of this is expected to result in a total operating income of $10 billion and FCF of $7 billion. Taking a longer-term view, Goldman Sachs believes GE could achieve double-digit FCF margins.
It is likely because GE has opportunities for FCF growth - particularly through service revenue growth at GE Aviation (for the Airbus 320 NEO and Boeing 737 MAX engines) and service revenue at GE Renewable Energy.
Secondly, there is self-help and leverage in the economy.
The self-help argument for GE's improvement is particularly applicable to the power and renewable energy segments, which management is restructuring through a multi-year process. The good news is that there are already tangible signs of progress. Going back to the March 2020 forecast meeting, GE projected that the energy segment's FCF would be negative in 2020. It turned out to be a slightly positive-an excellent result in the difficult environment of 2020 when access to facilities was hampered by the pandemic.
Similarly, GE Renewable Energy's management forecast assumed FCF would be worse than the $1 billion outflow in 2020 and remain negative in 2021. In reality, the outflow was $600 million in 2020, and management now expects the Renewable Energy division to bring positive FCF in 2021. In short, the recovery of these two segments is ahead of schedule.
As for how the fate of the company relates to the economic recovery, GE Aviation remains the company's most important business. The recovery of commercial flights will lead to more store visits for aircraft and engines. In addition, GE Healthcare has an opportunity for growth through the recovery of non-selective procedures, and GE Power's revenues should improve as access to sites improves
In this case, all of these optimistic arguments make sense. GE has every chance to grow its revenue and FCF in the coming years and based on the considerations above, it should be an attractive asset for investors.
While the price is below 13.90, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 12.92
- Take Profit 1: 12.00
- Take Profit 2: 11.60
Alternative scenario:
If the level 13.90 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 13.90
- Take Profit 1: 14.60
- Take Profit 2: 15.00
