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Motley Fool Issues Rare “All In” Buy Alert
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Shares in industrial conglomerate General Electric (GE 1.27%) soared a whopping 25.7% in October, according to data provided by S&P Global Market Intelligence. The move was partly due to a strong month for the markets. Still, GE’s 25.7% gain is significantly ahead of the S&P 500‘s 8% hike and reflects how much the stock was heavily oversold previously.
GE is having a challenging year. Its healthcare business has suffered revenue shortfalls due to ongoing supply chain dfficulties (management now expects $2.6 billion in GE Healthcare profit compared to initial expectations for $3.1 billion to $3.3 billion). GE Renewable Energy is set to lose $2 billion this year as the wind power industry continues to suffer supply chain challenges, declining demand (due to political uncertainty), and ultra-competitive pricing.
That said, the other two industrial businesses are in fine shape. GE Power is still on track for $1 billion to $1.2 billion in profits. And GE’s most significant business, GE Aerospace, is likely to report full-year results well ahead of previous guidance – management is now guiding toward a high-teens full-year profit margin for GE Aerospace compared to previous guidance for a mid-teens profit margin (with the same revenue guidance of 20% plus growth). By way of context, Raytheon Technologies also reported excellent results in its commercial aerospace-focused businesses.
When it all came together, it was enough for GE’s management to maintain its implied guidance for $4.5 billion in free cash flow (FCF) for 2022 during its third-quarter earnings presentation in late October. The earnings report buoyed Wall Street analysts, who are now forecasting $5.6 billion in FCF for GE in 2023.
Based on the current market cap of $85.5 billion, the $5.6 billion FCF forecast for 2023 puts GE on a forward price-to-FCF multiple of 15. Considering that a multiple of 20 times FCF is a good benchmark for a mature industrial, GE still looks undervalued.
GE now must hit its FCF target for 2022 while preparing for a spinoff of its healthcare business in January. The same management team (led by Scott Strazik) that successfully turned around GE Power is now charged with turning around GE Renewable Energy. Meanwhile, GE Aerospace can continue to grow strongly as it and GE Healthcare start to see an easing of supply chain pressures in 2023.
All told, GE remains an attractive stock for investors.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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