General Electric Tries To Go From Zero To Hero

A 10% jump on Wednesday was enough to make shares of General Electric NYSE: GE the best performers on the S&P 500. It will be a welcome break for investors who up until then were staring down the barrel at a retest of May’s lows.

Despite popping 55% from then through early June, shares of the $60 billion conglomerate never really shook themselves off after ravaging they got in Q1. Since June’s glimmer of hope faded it’s been death by a thousand cuts as the stock has trickled lower. For context, coming into yesterday’s sessions, shares were less than 10% away from decade lows. But Wall Street has always been willing to forgive and forget and after yesterday’s news, it might already be mapping out GE’s path to the upside.

Cash Flow Positive

In yesterday’s afternoon session, comments from CEO Larry Culp hit the headlines and sent the bids flying in. He was speaking at the Morgan Stanley Laguna Conference and his comments were far more upbeat and positive in their outlook compared to what management guided back in July; “we are really not waiting for the markets to come back and put the wind we had in our sails. We know this is going to be a self-help story for a little bit longer.”

Of note, he said current expectations are for free cash flow to turn positive this side of 2021 and for that trend to continue next year. The internal moves to support this happening include $2 billion in cost cuts and a further $3 billion in cash saving measures, moves that are evidently working.

The company has a lot of ground to make up from last quarter’s $2 billion cash outflow, reported in July’s earnings statement. The damage done to the aviation industry by COVID had a harsh knock on effect to the likes of GE, who for years have depended on that segment of their business to generate the most profits and cash. The ongoing recovery in the aviation space is seen as critical to GE’s recovery too.

Uphill Battle

In the meantime, management has a good bit of ground to make up with the sell-side to convince them of their ability to make good on the recovery. Less than a month ago, JPMorgan analyst Stephen Tusa reiterated his Neutral rating, while also speaking bearishly to the company’s prospects. In a note to investors he said "unlike peers, GE continues to have no official guidance, which in our view implies difficulty seeing 3-6 months out, while debt maturities and options resets suggest GE does not see normal until 2024".

The lack of guidance in the last earnings report, coupled with the lack of positive free cash flow have been the main headwinds of late but it looks like these are at last dissipating. If GE can continue to let the good news flow and deliver a beat on their next earnings report, then there’s plenty of reasons for value investors to get involved.

At 6.3, their price-to-earnings ratio is lower than where it was in the aftermath of the 2008 crash and allows for potential investors to feel like they’re getting a good deal here. Interestingly, shares are currently trading right around those levels too. Six years after those lows, GE’s stock was up close to 500%. Don’t make the mistake of thinking that many on Wall Street aren’t expecting it to do something similar this time.