General Electric (NYSE:GE) has had a difficult year. GE stock is down almost 15% in the past year and over 30% year-to-date. But I believe the stock is set for a major rebound over the next year.
For one, as I pointed out in my last article, the company’s management believes that it will produce positive free cash flow (FCF) in 2021. That will make the market wake up and take notice of the company.
Second, the company’s aviation division may get a breath of fresh air if Boeing (NYSE:BA) resumes its airplane production. For example, analysts now believe that the 737 MAX can begin commercial service by the end of the year, according to Barron’s.
Third, analysts are now waking up to GE stock and taking notice. Some major brokerage firms have recently written up the stock in a positive light.
What Analysts Say About General Electric
On Oct. 9, Goldman Sachs came out with a reinstated “buy” rating on GE stock. The analyst, Joe Ritchie, set a $10 price target on the stock, according to Seeking Alpha. He argues that the company will emerge stronger from the pandemic.
He believes that the company’s high margin businesses will recover, elevating its FCF to positive territory next year. This is a direct result of the company having become leaner in its operations. In other words, right-sizing due to the Covid-19 pandemic actually works.
GE expects to release its earnings on Oct. 28. Analysts expect a loss of 4 cents, which is up from a loss of 15 cents the prior quarter, but down from 65 cents a year ago.
Moreover, Barron’s reports that analysts estimate the company will burn through $1 billion in negative free cash flow. But the magazine says that the stock is in a “stealth bull market” since no one is noticing that it is moving up.
The main reason is that there no seems to be optimism that its largest and most profitable unit, aviation, will return to normal operations. This is a result of more people flying especially now that a Covid-19 vaccine appears to be close to approval. For example, Pfizer (NYSE:PFE) said on Oct. 16 that its Covid-19 vaccine could be ready under an emergency use authorization by the end of November.
What To Do With GE Stock
At the time I wrote my last article, on Aug. 20, I wrote that I thought that GE stock had reached a trough. I believed that once it became clear that FCF will turn positive, the stock would start to turn around.
Since then GE stock has risen from $6.20 to $7.38 today. That is an increase of 19%. However, at the time I wrote that I believe GE stock could be worth 72% to 129% higher. So my price target over the next year is $10.66 to $14.20.
Moreover, analysts seem to have higher price targets on GE stock. For example, Yahoo! Finance says that the average price target is $8.01. TipRanks says the average analyst target is $8.20, with a high forecast of $11 per share. Marketbeat reports that the consensus of 16 analysts is $9.27 per share. As a result, the range is between $8.01 and $9.27.
I suspect that this number will increase once the Q3 earnings come out and it appears that the company is turning a corner. As a result, if they can start to predict a positive free cash flow future, you could easily see much higher price targets.
Moreover, keep in mind GE still pays a dividend. Granted, the yield is only 0.52% as the annual dividend is only 4 cents per share. But this is still better than nothing.
There is always the hope that once its FCF returns to more normal levels, the company could restore the dividend. It previously 44 cents per share dividend as of Q3 2018 and on an annualized basis.
The Bottom Line
If the company appears to be on a path to positive FCF with its next earnings report, GE stock could continue to recover.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.