Source: PaxForex Premium Analytics Portal, Fundamental Insight
Relatively recently, General Electric seemed to be winning back the favor of investors. At the end of July, the company reported strong earnings, although it lowered its full-year free cash flow forecast. As a result, GE stock surged almost 30% between mid-July and mid-August.
However, that momentum didn't last long. Concerns about inflation, rising interest rates, supply chain chaos, and a possible global recession made stock drop 18% in August, wiping out almost all of the gain it had made in late July and early August. This presents a great buying opportunity for long-term investors.
Just last week, GE stock was down more than 10%. Higher-than-expected inflation in August could not but help that drop. Nevertheless, warnings from GE's top management about continued supply chain difficulties also caused the stock to fall.
CEO Larry Culp has made it clear that GE's supply chain issues won't go away that easily. But the company is working hard to tackle weaknesses in its supply chain. And in the aerospace segment, which is having the most difficulty meeting production goals, the issues should diminish as suppliers rebuild their staffs after deep layoffs to survive the steep downturn two years ago.
In short, while supply chain problems will persist next year, they won't last forever. Long-term investors shouldn't worry too much about temporary trouble, which is unlikely to affect GE's growth or earnings in 2025, let alone in 2030 and beyond.
Raising worries about how inflation and rising interest rates will affect the economy have also caused GE stock to fall over the past month. Many investors consider General Electric as an economic indicator: that is, its earnings and revenue prospects are closely tied to the health of the economy.
That was once true, but that's no longer the case. Over the past several years, the once successful industrial conglomerate has exited the railroad industry as well as the oil and gas industry. The company has also scaled back its energy business by selling off a number of assets. These moves have reduced the company's sensitivity to macroeconomic trends.
Today, GE's business value is largely concentrated in two segments: healthcare and aerospace. The health care business is somewhat insulated from broader economic trends; the products and services it sells are necessities.
The airline business has traditionally been very sensitive to economic trends, but the coronavirus pandemic has disrupted that connection. Airlines continue to enjoy pent-up demand and are building capacity to pre-pandemic levels, which is good for GE's engine maintenance business. High oil prices have also sparked renewed interest in upgrading aircraft to more fuel-efficient designs, which has boosted demand for next-generation engines.
As supply chain headwinds ease, healthcare and aerospace businesses should deliver impressive revenue and profit growth regardless of macroeconomic conditions. Therefore, the recent sell-off in GE stock looks like an even more attractive buying opportunity.
Rising revenues and profits from a rebound in the aviation market, increased demand for medical services, and restructuring in the energy and renewable businesses will provide GE stock with significant growth under any circumstances. But General Electric's plan to split into three separate companies focused on aerospace, health care, and energy will boost that growth.
GE is planning to spin off its health care division in early January. As a predictable, high-margin business, GE HealthCare should get a higher valuation than the entire company today.
The planned 2024 spin-off of GE's energy and renewable energy segments into a new energy-focused business will separate these highly volatile and low-margin businesses from the aerospace division, which is GE's crown jewel. The remaining aerospace business is poised to grow rapidly as supply chain problems fade, taking advantage of pent-up demand. It also deserves a much higher valuation than what GE stock is getting in the market today.
The current market value of General Electric stock is about $73 billion, just 10 times the $7 billion of free cash flow the company expects to generate in 2023. Ongoing supply chain problems could disrupt GE's ability to meet that goal in the near future. However, in three years, free cash flow is likely to be even higher. This makes GE stock very favorable at its current price.
As long as price is above 65.00, follow the recommendations below:
As long as the price is above 90.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 66.18
- Take Profit 1: 70.00
- Take Profit 2: 74.00
Alternative scenario:
If the level of 65.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 65.00
- Take Profit 1: 63.00
- Take Profit 2: 60.00
