Stock in industrial giant General Electric has lagged behind the market for a month. Investors, it seems, would like something big to happen. They might just get what they wish for.
Coming into Thursday trading, General Electric (ticker: GE) shares are down about 6.5% over the past month. The rest of the industrial universe, however, has been just fine. Industrial stocks in the S&P 500, for comparison, are flat.
Part of the reason for recent underperformance is, of course, because GE stock has already been doing well. It has climbed more than 20% year to date, better than the market and better than the Industrial Select Sector SPDR ETF (XLI). GE shares have been propelled partly by the global economic recovery and partly by management action, as the company has continued to sell assets and pay down debt.
Most recently, GE announced the sale of its aircraft leasing unit, called GECAS, to AerCap (AER) back in March. The deal will bring more than $20 billion into company coffers, which GE can use to further repair its balance sheet.
Investors might be getting addicted to catalysts, like these splashy asset sales. The good news on that front, though, is that more might be coming. William Blair analyst Nicholas Heymann has three catalysts he’s looking for in coming months.
Heymann believes GE will still exit its healthcare business. In late 2018, GE discussed a partial initial public offering of its healthcare unit to raise needed cash. GE Healthcare makes equipment such as ultrasound and MRI scanners, among other things. GE, however, ended up selling its biopharma business to Danaher (DHR) for more than $20 billion last year. A healthcare sale or spinoff could come in the second half of 2021, according to Heymann.
“Removing [healthcare] will bring more GARP investors onboard,” says Heymann, who rates GE stock Buy. GARP is short for growth at a reasonable price; it’s a subset of growth investing. GE was a core large-cap, GARP-type holding for institutional investors for decades before the company hit its recent rough patch that resulted in a lot of management turnover.
GE didn’t immediately respond to a request for comment.
RBC analyst Deane Dray pointed out recently to Barron’s that GE is “under-owned” by institutional investors focused on large-cap stocks. Part of the GE turnaround is about fixing the business. Part, however, is also about restoring confidence with the investment community.
Heymann also believes moving to “one set of financial statements” is another catalyst. Simplification of GE has been a goal of CEO Larry Culp since he took over in late 2018. When GE finishes with the GECAS sale, there will be no more separate reporting for GE Capital. GE Capital once had more than $600 billion in assets, making GE as much of a bank as an industrial company. GE should be using one set of financials by the end of 2021, making the stock much easier to follow.
The final catalyst Heymann predicts is that GE will start being seen as the largest ESG company in 2022 and beyond. The analyst says about 50% of GE’s sales eliminate—rather than reduce—carbon dioxide emissions. “This will climb to [about] 75% when GE Aviation begins producing green hydrogen [engines] early next decade,” adds Heymann.
Being perceived as an environmentally friendly company can boost valuation multiples, according to Heymann. GE stock trades for about 17.5 times estimated 2023 earnings. The S&P 500 trades for about 18.5 times that number. The Dow Jones Industrial Average trades for about 17 times estimated 2023 earnings.
Heymann is a GE bull; for him, a Buy rating means he expects outperformance versus other stocks he covers and the market.
If these catalysts unfold, GE will still have to keep executing on its base business. Management has guided to between $2.5 billion and $4.5 billion in free cash flow from its industrial businesses for 2021. That guidance is something investors would like to see narrowed, ideally with the midpoint maintained and possibly raised when the company reports second-quarter earnings on July 27.
Write to Al Root at [email protected]
