How General Electric Can Double Its Free Cash Flow and Lift the Stock


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General Electric’s free-cash-flow yield is low relative to its peers’.


Loic Venance/AFP via Getty Images

Industrial giant

General Electric

has trying to pull off an epic turnaround, but all the changes make it difficult to tell what earnings will look like down the road. Citigroup analyst Andrew Kaplowitz says the stock is a Buy because things are working out just fine,

There is lots to consider. GE has changed its CEO, hiring
Larry Culp
in 2018. It has paid down billions in debt, sold businesses, and restructured others.

Kaplowitz recently spent time with GE management, writing to his clients Thursday that things seem to be on track for 2021. His target for the stock price (ticker: GE) is $17, while the shares were at $13.46 on Thursday afternoon.

GE expects sales in its industrial businesses–including aviation and power generation–to grow at a percentage in the low single digits in 2021. Management has forecast about 20 cents in per-share earnings and says free cash flow from its industrial businesses will come in between $2.5 billion and $4.5 billion.

All that would be an improvement over 2020, but GE stock still trades for about 68 times 2021 projected earnings, indicating investors are already giving the conglomerate credit for lots of future improvements. GE’s market capitalization is roughly $118 billion, for a free-cash-flow yield of less than 3%.

The stock looks expensive relative to the average industrial conglomerate, which trades for roughly 26 times estimated 2021 earnings. The average free cash flow yield is closer to 4%.

Down the road, however, Kaplowitz is optimistic GE will generate about $7 billion a year in free cash flow. “Our sense is that operational improvements and turnaround efforts continue to gather traction, driving increased confidence in continued [free cash flow] upside beyond ‘21,” wrote the analyst.

Higher cash flow would make the stock look cheaper. And the money would enable the company to pay a higher dividend eventually, as well as to make acquisitions.

With $7 billion in annual free cash flow. GE stock could trade at $20, based on the valuations of its peers. Cash flow won’t be that high for years, so GE stock isn’t worth $20 today, but the numbers show how Kaplowitz arrives at his target of $17.

His call isn’t far from what his peers are saying. Wall Street projects about $7 billion in free cash flow by 2023.

Other Wall Street analysts are a little more cautious than Kaplowitz, perhaps wanting to see improvement before going all in on GE stock. GE stock has been a difficult one for investors, dropping about 57% in total over the past five years. The average analyst price target for GE stock is about $14.30, about 6% higher than recent levels.

Still, on balance, Wall Street likes GE stock these days. Overall, 62% of analysts covering the stock rate shares Buy. Only about 25% rated shares Buy when Culp took over in late 2018, while the average Buy rating ratio for stocks in the

S&P 500

is roughly 55%.

The optimism has been rewarded so far. Year to date, GE stock has gained about 25% year, better than comparable gains of the

S&P 500

and

Dow Jones Industrial Average.

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