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General Electric: Is It Worth The Investment?

industrials investing strategies Mar 05, 2021


While GE may be an older and sleepier company, we wanted to provide you with some alternatives to technology stocks if you're worried about the sell-off in the market over the last few weeks. And while we fully admit that GE is certainly not as exciting of a pick as a company like Tesla, it doesn't mean that it is a bad investment! Often investments like these are ignored and therefore undervalued and ripe for appreciation! While investors have been pouring money into "story stocks" companies like GE are churning out a profitable business year over year ($5.3 billion in net income - while companies like Tesla have close to $0).



So what does GE really do? GE operates through the following segments: aviation, healthcare, power, renewable energy, digital industry, additive manufacturing and venture capital and finance - a true conglomerate (playing in industries most people do not realize). So why do we like them? Mainly for increased FCF but let's discuss the following two underlying reasons:

1) Power and Renewable Energy: We forecast additional FCF (see note below) via their energy business. When looking at historical numbers, we see a pickup based on management expectations as well as changes in the underlying dynamics of their portfolio. Using the increased FCF, we anticipate a reinvestment in their core energy portfolio, therefore bringing around more predictable, long lasting revenue sources.


Boring Definition: Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement.

What it means: Think of it like this, when companies show net income, they're factoring in non-cash charges like depreciation and amortization. The main reason they do this, is to lower their taxable income! So when looking at FCF, we view this as a better alternative for net income generation! We use this number to anticipate how GE can do things such as reinvest in their business, pay a dividend, etc.


2) Their stronghold in aviation: While their core commercial aviation business was certainly down in 2020 and will be in the first half of 2021, we anticipate a strong rebound in their aviation portfolio. While the business starts to recover, based on conversations with their team, we anticipate this business line to generate over $2B in FCF! This number will be stronger than anything they've historically generated from this unit and can allow them to reinvent themselves across the company!



While GE has long been a favorite of value investors, we see this as a very interesting inflection point in the company's longstanding history. We anticipate that with the new changes to their business, GE should be able to generate significant FCF. This FCF is the core driver our growth forecast for GE and is something we'll continue to monitor. As such, our new model anticipates a hefty stock price increase that will take time to materialize. With a lower dividend than usual, GE is now more of a growth play than ever!



Ticker: GE

Rating: Overweight

Price Target: $17 (27% Upside)

Target Date: 12 Months