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It’s been a while since I last wrote about General Electric (NYSE:GE) and GE stock. So long, in fact, that the industrial conglomerate now trades near $100.
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When I wrote about GE in late April, it was only trading around $13. To get that kind of liftoff, it must have reinvented the lightbulb or something.
Just kidding. I’m fully aware of the company’s recent 1-for-8 reverse stock split, which GE shareholders approved at the annual meeting in May.
Anyway, enough with the frivolity. Let’s get down to business. In April, I said GE was an excellent buy around $12, a buck lower than where it was trading at the time. Post-split, that’s $96.
I don’t think much has changed on the news front — other than the stock split — so I would argue that the premise remains a good one. Here’s why.
Why Is GE Stock a Screaming Buy Under $100?
GE reported better-than-expected second-quarter 2021 earnings at the end of July. Sales were $18.3 billion, which is $6 million higher than the consensus estimate and 8.8% higher than a year earlier.
On the bottom line, GE earned 5 cents per share in the quarter, which is 25% higher than analyst expectations and considerably higher than its 14-cent loss in Q2 2020. Moreover, across all four of its industrial segments, it had strong orders and revenue growth. If not for the $99 million loss from its Renewable Energy segment, all four areas would have been in the black in Q2 2021.
Equally exciting is that GE upped its industrial free cash flow (FCF) guidance for 2021 to $3.5 billion to $5 billion. That’s major news.
Based on a midpoint of $4.3 billion, GE stock currently has an FCF yield around 3.8% and rising. That’s impressive when you consider that this time last year, the company had an industrial FCF loss of $4.28 billion for the first six months of 2020. At the end of last year, it had a full-year FCF of $606 million. That was down from $2.3 billion from 2019, but still positive for the entire year.
Should it meet its FCF guidance at the midpoint, it would deliver industrial FCF growth of 610% in 2021. That alone ought to drive GE stock higher heading into 2022.
A Return to GE’s Roots
In March, GE announced it would sell its jet-leasing business, GE Capital Aviation Services (GECAS), to Aercap (NYSE:AER) for $24 billion in cash and 46% of the combined entity.
It’s a big reason why I included GE in a group of dividend stocks to buy back in March. I believe the company’s move to return to its industrial roots will pay off for patient investors (and make GE CEO Larry Culp a wealthy person in the process.)
More importantly, the results from the second quarter show that the company’s industrial operations have turned a corner. As a result, it would not surprise me if all four segments were generating non-GAAP profits by this time next year or shortly thereafter.
As it stands now, the healthcare unit had the largest non-GAAP profit at $1.42 billion in Q2 2021, followed by aviation at $833 million, power at $243 million and a $296 million loss from renewable energy.
Margin-wise, the healthcare unit had a segment profit margin of 16.8%, 370 basis points higher than the same six months in 2020. So while sales in the unit grew 9% year-over-year, the 39% growth rate for profits really stands out.
All four segments saw margin growth in the first six months of 2021. Thus, if GE can finish the final two quarters of 2021 positively, it will have two segments with double-digit profit margins for the year. That’s very positive.
Is GE Stock a Buy at $100?
As I write this, GE stock is trading around $104. That’s $13 on a pre-split basis. In April, I thought it was a buy at around $12. Since then, the business has gotten that much stronger.
Culp told BNN Bloomberg he believes the Aercap deal makes GE “a far more focused, simpler and stronger company.” I don’t think there’s any question that he’s right.
So, while a long-term investor isn’t likely to be hurt by buying at current prices, you should step up to the plate if you can get some shares at $96 or less in the coming weeks. The old GE is getting back to being its old self — and that’s an excellent thing.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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