Is GE Stock Overvalued?

General Electric Company (NYSE:GE) took a nosedive as markets tumbled during the early days of the global pandemic. It dropped from a 52-week high of $13.26 to a low of $5.48 practically overnight and since struggled to get back up while the general market largely recovered.

In fact, GE stock has been in a freefall since 2017 after just barely recovering from the 2009 global financial crisis. It’s a strange situation for one of the oldest companies in this country. However, analysts caught wind of a recovery, and the stock has been on a hot streak throughout October heading into its month-end earnings report.

This has some analysts wondering – is GE stock overvalued?

GE Vs Competitors

The industrial sector was hit hard in the aftermath of the coronavirus, but GE has been outperforming its peers by jumping 23 percent in value in the month leading up to its third-quarter earnings report.

The company’s main money-generating businesses are GE Power, GE Aviation, GE Healthcare, and renewable energy.

As one of the world’s leading jet engine manufacturers, GE found itself in a precarious position as air travel slowed to a halt. This was one of its fastest-growing segments in previous years, but now it’s dragging the company down, along with healthcare, as patients avoided routine voluntary care.

However, GE has tricks up its sleeves that have investors salivating at its prospects. Here’s why GE could be on its way up (and why it may well justify its market cap in spite of a struggling economy).

Why GE Stock Went Up

GE was a growth stock at the turn of the millennium, but failure to adapt to market changes caused it to decline over 70 percent since then, from a high of nearly $60 to a trading range comfortably under $10 per share.

The company cycled through three CEOs in as many years landing on H. Lawrence Culp Jr. in September 2018.

Culp pushed hard for more transparency in the beleaguered company’s financial reports, which are burdened by losses in its aircraft engine business, healthcare, and energy compared to the prior year. In addition, there’s buzz that the company may eat some more losses in its aerospace division.

However, things finally started looking up by late September.

Rumors circulated that the company would outperform earnings estimates, and these sent the stock on an upward swing, gaining nearly 30 percent in value over the course of the month of October.

Much of this is based on the earnings reports from airlines like American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL) reporting improvements in passenger bookings. This news gave investors hope that the company’s engines would find use now that airplanes are no longer grounded and travel is picking up speed.

The holiday season is the busiest for air travel, and bullish investors believe GE bottomed out and is on its way back up. Before we can make that call, however, we must examine the company’s financial statements.

GE Financials Statements Are Ca

GE beat analyst estimates throughout 2020, showing how resilient and possibly undervalued the company is. Its second quarter earnings report showed $17.7 billion in reported GAAP revenue, versus the $17.12 billion forecasted.

However, the company’s overhead and expenses from the coronavirus ate into that, causing a -$1.6 billion operational loss. It dropped $2.1 billion in industrial free cash flow too. This caused a loss of $0.15 per share actual versus the $0.10 per share forecasted for the quarter.

While it beat analyst estimates for the September quarter too, it’s still operating at a loss.

Still, the company reduced its debt load by $22 billion since the beginning of 2019, and it’s implementing aggressive cost-cutting measures to improve its bottom line for the next year.

This helped it accomplish more with less resources, which contributed to the steady climb in its market value in the fourth quarter of 2020. But is GE’s market cap value too high?

Is GE Valuation Too High?

GE traded under $10 since the coronavirus crash. Its market capitalization was just shy of $70 billion at last count.

This is a long way from the $30 range it traded for in 2017; it could double in value over the next two years and still not reach those levels.

In fact, if GE keeps up its progress and fixes its cash flows, it stands to grow back to that $30 range over the next five years, even if that road takes a while.

The company also has an annual dividend yield of $0.04, which is paid out quarterly. This 0.55 percent yield was set in 2018 as part of its cost-cutting efforts.

The company essentially prepared for the effects of the coronavirus pandemic before it existed. It wasn’t on purpose – it simply was already struggling, and the rest of the market caught up (or rather down) to it.

It’s trading at just over four times earnings, and that could present a value for long-term investors, even if it does drop.

Will GE Stock Drop?

While expectations are high, GE’s stock can still lose some of its luster over the next few years. The pandemic proved it has several obstacles in its way, as Boeing (BA) reported a 20 percent drop in airplane orders over the next few years from its inventory.

This could lead to a subsequent drop in the need for airplane engines, although it could also mean the airlines will replace the engines over the planes.

While the stock may drop, the company’s tenure gives analysts good reason to be bullish for its growth potential.

Is GE Stock Overvalued? The Bottom Line

GE is a longstanding company with revenue coming from a variety of sources. Although it dropped during the coronavirus crash, it was already in the process of reorganizing and restructuring through the end of the 2010s.

Several of its divisions are losing money, but its cost-cutting measures are effectively staving off these losses. It has plenty of cash to keep operating through troubled waters over the next year, and it has a lot of growth potential.

If you’re looking for a long-term investment that’s already proven it can sustain a value three times what it is today, GE may be just the stock for you.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.