The stock market has been a mixed bag for investors these past few weeks. The S&P 500 has risen roughly 6% since June, however a lot of the high-flying growth stocks have been beaten down. This indicates a shift in investor preference to stable blue-chip stocks. One such stock I believe that can do well in such an environment is General Electric (NYSE:GE).
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GE stock has been consolidating since March within a tight range of $97.60 and $115. As it consolidates, the 200-day moving average moves closer to the stock’s support level. Therefore, given the right catalyst, there is a strong possibility that GE stock breaks out to new highs soon. There are few catalysts occurring for such a move.
GE is Once Again Becoming an Industrial Powerhouse
Under the leadership of CEO Larry Culp, GE is becoming a more focused high-tech industrial company. This is evident in the second quarter results, which shows a company that is on the rebound. Consolidated revenues for the quarter grew by 8.8% to $18.3 billion. This is driven in large part by the rebound in industrial activity, which saw a decline last year due to the disruptions caused by COVID-19. The Aviation, Healthcare and Renewable segments all saw solid gains for the quarter.
In particular, I’d like to focus on the results from the Aviation segment as this can serve as a bellwether for economic activity and an indication of where we are in the Covid-19 crisis. Aviation revenues increased by 10% year-over-year driven by a 23.7% increase in Commercial Engines & Services revenues. This segment’s revenues would have been much higher if not for a decline in Military revenues due to timing and supply chain issues.
The other industrial-related segments have had solid results as well. The Healthcare segment saw orders of $4.6 billion, a 14% increase compared to the same time last year. I believe orders will only start to accelerate in the future as hospitals return to normal. The Renewable energy and Power segments saw increases in revenue as well. Revenue for these segments grew 7% and 67% respectively. These results make me bullish on the continued recovery in industrial activity.
High Free Cash Flows Is a Boon for GE
GE management is quite optimistic with regard to its future business prospects. The company recently revised its full-year cash flow guidance. The company’s new guidance on industrial free cash flow (FCF) is between $3.5 billion to $5.0 billion. This is a notable increase from the previous guidance of $2.5 billion and $4.5 billion. Management has guided for high single-digit free cash flow margins over time.
It is important to consider free cash flow when looking for companies to build out the defensive portion of a portfolio. FCF is an important measure to consider as it is less easily manipulated and takes into account capital outlays. Cash flow is especially important for turn-around situations like GE.
Wall Street is starting to take notice of these improvements as well. A solid 67% of analysts currently rate GE as a Buy. This is much higher than the average Buy-rating ratio for stocks in the S&P 500 of about 55%. Furthermore, GE does not have a Sell rating from any Wall Street analyst as opposed to the average Sell-ratio of 7% for stocks in the S&P 500.
GE Stock Is a Good Value
The looming specter of inflation makes stocks that generate strong growing cash flows a good alternative to bonds. GE stock is trading at a good valuation assuming the company hits the midpoint of its FCF cash flow guidance of $4.25 billion. The current market capitalization of $111 billion gives the stock a FCF yield of roughly 3.8% (i.e. $4.25 billion / $111 billion).
Considering that the 10-year government bond yields about 1.36%, GE stock is fairly valued from a cash yield perspective. Assuming a rapidly recovering U.S. economy, GE will be able to grow its FCF even faster resulting in an even higher yield for investors who buy in early. Investors should consider GE.
On the date of publication, Joseph Nograles 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.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.
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