General Electric (NYSE:GE) stock has done quite well so far this year. As of today, the stock is up nearly 22% year-to-date (YTD) and over 102% for the past year. Moreover, it looks like GE stock is still very cheap at $13.12 per share on May 4. According to my analysis, it could rise at least another 29.6% to $17. This is based on its free cash flow (FCF) and FCF yield.
For example, General Electric just reported its first-quarter earnings on Apr. 27. It showed good growth in its “adjusted Industrial profit margin” to 5.1% of sales.
But more importantly, GE produced massive FCF during the quarter. The company said its adjusted (excluding BioPharma) industrial FCF was $1.7 billion over the past year. This works out to an FCF margin of 2.2% on its $77.2 billion in revenue over the past 12 months.
GE Stock: Free Cash Flow Yield Valuation
GE provided very specific guidance in its earnings release for 2021 (Page 5). The company’s outlook gives investors a good deal of hope. It provided four areas of guidance.
For example, the company said its industrial revenue would “grow organically in the low-single-digit range.” Moreover, its profit margin should expand by over 250 basis points. That will put it at around 7.6% to 8.0%. I suspect that the FCF margin will be similar, if not higher than this.
However, at the end of its outlook guidance for 2021, General Electric said it expects FCF to be between $2.5 billion and $4.5 billion. Therefore, assuming that it makes $4 billion (taking the upper end of that range), this works out to an FCF margin of 5.2% on revenue estimates of $76.95 billion for 2021. That is a very profitable FCF margin.
It also means that GE stock has an attractively valued FCF yield. For example, if we divide $4 billion by today’s market cap of $115.1 billion, the FCF yield is 3.47%.
A more appropriate yield would be 2.5% to 3.0%. So, if we used a 2.75% FCF yield for example, GE stock would be worth $145.5 billion (i.e., $4 billion / 0.0275). This is over 26% higher than today’s market cap.
This implies that GE stock is worth $17 per share using an FCF yield of between 2.5% and 3.0% over the next year. And, if the company does better than $4.5 billion, GE stock could easily fly higher.
What to Do with General Electric
Analysts seem to agree — albeit not as excitedly — that GE stock is still undervalued despite its rise over the past year. For example, Yahoo! Finance indicates that 14 analysts give this name an average target price of $14.46. This represents a 10% gain over today’s price.
However, other surveys are not as sanguine about the worth of GE stock. Both Seeking Alpha and Tipranks, for example, have price targets below $14 per share — $13.83 and $13.92, respectively.
That said, one of the real areas of progress with GE is its reduction in debt. During the quarter, General Electric lowered total debt by $4 billion to $66.89 billion (Page 8). This is still double its shareholders’ equity of $33.6 billion.
At this pace, total debt could fall further to 1.5 times GE’s book value, which will make its risk significantly lower. That will help give the stock a higher valuation, too.
This could help it rise to $17 over the next year, providing investors an ROI of over 29% from today. And, given its healthy free cash flow, the company has a good chance of recovering even further still. So, investors should take advantage of this price — GE seems to be a smart contrarian play.
As one analyst in Seeking Alpha puts it, there may be more “short-term pain” from its aviation unit, but it will lead to “long-term success.” That analyst says the company has shown “tremendous progress in cutting costs and it seems to be on the path to recovery broadly speaking.” I tend to agree.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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