General Electric: A Wait-and-See Stock

General Electric (GE) is a Boston-based high-tech industrial company operating worldwide. The company presently has only four major working segments, namely the power segment, the renewable energy segment, the aviation segment, and the capital segment after divesting from several other segments in the recent past.

Last December, Guidehouse Insights recognized it as a leader in the Software delivery space to manage Distributed Energy Resources (DER) on the electric grid. It was also one amongst the Fortune 500 and declared as the 38th largest company.

General Electric stock had quite a disappointing past 12 months. GE has underperformed the S&P 500. Its current focus is on cost-cutting strategies and turning around some of its existing operations. Its strategies like spinning off certain business segments or getting into new attractive ventures had a positive impact on the overall performance of the stock until it got caught in the overall market sell-off.

There is still a lot of ground to cover for GE, and we would recommend a Hold until there is more clarity on how the company’s strategies are panning out.  

It’s not the first time GE has faced headwinds. The company has a history of working its way out of multiple challenges and growing into a giant conglomerate. This time it is trying to shrink itself. Its restructuring decisions seem to be working quite well, for now. Following those decisions, the company has had a better start to the year than the market, down 5% year-to-date vs. the S&P 500’s 10% decline. The market believes GE has a lot of growth potential. 

A few months back, Nigel Coe of Wolfe Research reiterated an outperform rating on General Electric stock, stating, “Full SOTP (sum-of-the-parts) value may come after the split is executed.” He had also raised the price target on the stock to $136 based on higher 2023 estimates that he feels are more closely aligned with the company’s new $13 billion EBITDA target and still represents a small discount to the year-end 2022 SOTP of $145.

Improving Balance Sheet Position

General Electric financials got a major blow during the pandemic as some segments of its business-like aviation are heavily people-oriented and had to undergo losses due to the countrywide lockdowns. However, as time progressed, the company started preparing to get back to the pre-pandemic levels.

GE went through a 1:8 reverse stock split in August 2021, and following that decision in the third quarter of 2021, its total orders increased by 42% as well. Additionally, the loan amount and loan-related interest expenses also showed some level of reduction. Besides, GE also managed a decent 5% net profit margin for that quarter against the 7.2% loss achieved a year ago.

However, its overall quarter revenue fell short by 1% year-over-year. For the nine-month period ending September 30, 2021, a more than 6% reduction in profit margin year-over-year was noticed instead. These numbers are the major reasons for us having a Hold rating on the stock.

The Spin-Off Strategy

General Electric has been planning some impeccable strategies for positively influencing its valuation. One such strategy is the decision to spin off certain sections of its business. In November 2021, the company decided to become three industry-leading, global, investment-grade public companies focusing on the growth of its aviation, healthcare, and energy sectors.

The company intends to undertake a tax-free spin-off of its healthcare sector by 2023 and retain a 19.9% stake in the newly formed healthcare company. Further, by 2024 it wants to complete another tax-free spin-off and create a new publicly-traded company by combining its renewable energy, digital, and power sectors. Thereafter, it would be a pure-play aviation company.

With this decision, the company expects that it will gain significant momentum by strengthening its financial position and operations as a whole. Its main intention is to improve its operations to establish a successful and sustainable growth rate in the existing portfolio of businesses and achieve a high-single-digit free cash flow margin in 2023.

Moreover, it also plans to use the proceeds from the closed businesses to reduce its debt burden in the near future.

Wall Street’s Take

Turning to Wall Street, GE stock comes in as a Moderate Buy. 10 out of 14 analysts have given GE a Buy rating, while four analysts rate it a Hold.

The average General Electric price target of $118.36 represents 33.5% upside potential.

Acquisitions

Mergers and acquisitions with great potential are known to be one the most convenient ways to attain significant growth in a short period of time. So, like many other successful businesses, General Electric, too, opted for a similar resort and made a string of acquisitions last year with some well-reputed organizations.

Like in December of 2021, the company decided to acquire Canadian software company Opus One Solutions Energy Corporation to facilitate the integration of renewables and distributed energy resources at scale across the electric grid.

Again, on the same day, it also completed the acquisition of BK Medical, a surgical visualization company, for $1.45 billion to improve its pre-and post-operative ultrasound capabilities and also enhance the end-to-end healthcare offering.

Conclusion

General Electric has made some significant changes in its operations, but there is still a lot of uncertainty regarding its success. The market is still waiting for the company to announce further details about its spin-off decisions.

Moreover, its plans to become a fully aviation-focused company might not prove to be that profitable during the pandemic era. However, there is still a possibility of its shares rebounding if the pandemic situation improves. 

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