What to do with General electrical (NYSE: GE) shares? The shares had a highly volatile cycle in 2020, falling until April and then rising more than 73% from October only to end the year with a drop of only 3.2%. So, what can investors expect in 2021, and is it still worth buying the shares?
The case for buying shares in General Electric
Here is a summary of the investment case to the stock. GE investors expect the company’s free cash flow (FCF) to improve dramatically in the coming years. The improvement will come from a combination of a recovering commercial aviation market and continued strength in military aviation, leading to a multi-year recovery at GE Aviation.
General Electric needs commercial air traffic to get back. Image source: Getty Images.
GE Health Care will continue to generate low to medium single-digit growth and generate more than $ 1.2 billion in FCF in the medium term, led by its world-class image scanners. In the meantime, CEO Larry Culp is expected to use his operational experience to design improvements in the margins of GE Power and GE Renewable Energy – not just cutting costs and working through unfavorable legacy contracts. In addition, Culp is optimizing the organization and aggressively cutting corporate costs.
How General Electric can be assessed
Wall Street analysts expect these combinations of events to result in a FCF turnaround for a outflow from about $ 1.2 billion in 2020 to FCF of $ 2.8 billion in 2021 and $ 4.6 billion in 2022. To put the last figure into context, that would mean that GE trades at about 22 times its FCF in 2022 (assuming the market capitalization remains the same).
That would be a good assessment for the company when you consider that most aviation observers do not believe that passenger traffic will return to 2019 levels by 2023 or 2024 – in other words, GE Aviation should continue to growth recovery mode for a few years after 2022, while GE Renewable Energy is expected to start generating FCF in 2022, at a minimum, with GE Power possibly arriving a year earlier.
A gas turbine. Image source: Getty Images.
That said, there is a powerful case that GE has good long-term value and, a few months ago, stocks seemed to have very good value based on risk / reward.
The stock price has gone up a lot, so it’s fair to say that GE is not as attractive as before. Simply put, the potential payoff has decreased, but many of the risks remain. There are five main points of discussion.
First, there is no guarantee that commercial aviation markets will develop as expected, and there is also a possibility that GE’s highly profitable engine replacement sales will suffer a long period of weakness due to the excess of engine replacement parts on the market.
Second, although Culp appears to have room to cut costs at GE Power – the gas turbine market remains overcapacized – the question is, what next? Given the increase in renewable energies, it is difficult to see the gas turbine market growing at less than a single digit, if that.
Third, the renewable energy market remains fiercely competitive among its peers Vestas, Siemens Gamesa, and GE. Any of them may find it difficult to win new contracts if they try to guarantee a job with higher margins.
Image source: Getty Images.
Fourth, investors always need to consider the main risk of the economy – something that industrial investors know. In addition, consider that GE’s FCF will not yet become close to an acceptable value for some years to come.
Fifth, even if you believe that GE will get some help from end markets in the future, there are many other stocks that you could buy with cheaper valuations, but with the same title risk.
Are GE’s shares a purchase?
In short, and given the choice between buying and selling, I think GE is a purchase. However, this does not mean that you we must buy the stock. As noted above, there are many other stocks that appear to have better values on a risk-adjusted basis. For example, Raytheon Technologies in aviation and Shipping company in the industrial sector in general.
That said, GE is still a useful investment option and seems a little underrated, but not because This one A lot of. GE’s shares are still a purchase; just don’t expect the type of return generated by stocks in the past six months to repeat itself in the near future.
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The views and opinions expressed in this document are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.