General Electric (NYSE:GE) is undergoing a major transition, and investors have made it abundantly clear that they’re not comfortable with it. However, this isn’t necessarily a sign that General Electric is in real trouble. Rather, it’s just a textbook example of how the market dislikes change and uncertainty.
Not all change is bad, and uncertainty typically gives way to certainty sooner or later. Consequently, while it’s a gutsy move, investors could get a good value right now while the market frets over GE’s transition to a potentially leaner and better business.
Rescuing a fallen icon
General Electric CEO Larry Culp has a tough assignment, to say the least. He’s tasked with rescuing the company from years of decline in the wake of the previous chief executive’s missteps.
As a reminder, the biggest companies in the U.S. stock market haven’t always been all technology companies. Thirty years ago, General Electric was among the giants on Wall Street, but fast-forward to the 2020s, and the company is now little more than an afterthought in the financial media.
Part of the problem is that GE tried to be and do too many things at once. Along with manufacturing light bulbs and home appliances, the company sought to compete in the areas of aerospace, energy and even healthcare.
Culp is evidently reversing this, with General Electric having spun off its health-care segment as GE HealthCare Technologies (NASDAQ:GEHC) about a year ago. Furthermore, General Electric plans to separate its energy and aerospace businesses (GE Vernova and GE Aerospace, respectively) into separate, standalone entities in April.
Here’s the problem. GE just released its fourth-quarter results for 2023 and its financial outlook for the first quarter of 2024. In the data and guidance, the company included GE Vernova and GE Aerospace alongside all of the other business units in a combined entity.
For Q1 2024, General Electric guided for earnings of 60 cents to 65 cents per share. Meanwhile, analysts have forecast quarterly earnings of 70 cents per share. On the top line, GE guided for “high single-digit revenue growth” in the first quarter, although Wall Street had projected sales growth of approximately 6%.
Thus, investors may be unhappy with the company’s near-term financial guidance. However, they shouldn’t put too much emphasis on this. It won’t be long before General Electric separates its energy and aerospace units.
In other words, disappointed investors are focusing on the immediate future while they ought to concentrate on what post-breakup General Electric will look like in a year, five years, or a decade. Culp is making hard choices now in order to secure GE’s future. As a result, if the company (or more precisely, companies) can succeed as separated business units, this could be a major win-win for GE stakeholders.
Good results and a good value
Moreover, it feels like the market is simply ignoring General Electric’s fourth-quarter financial results, which were solid overall. The company generated $18.5 billion in quarterly revenue, beating Wall Street’s call for $17.2 billion.
Not only that, but General Electric also reported Q4 adjusted earnings per share (EPS) of $1.03, while analysts only expected the company to earn 90 cents per share. Furthermore, GE’s adjusted EPS result demonstrated vast improvement over the year-earlier quarter’s adjusted earnings of 66 cents per share.
In addition, while Wall Street anticipated that General Electric would report free cash flow of $2.9 billion for Q4, the company beat this by posting approximately $3 billion in free cash flow. These results included all of General Electric’s currently included business units, so the market should understand that the company isn’t doing badly from a financial standpoint.
Yet, investors can be hard to please sometimes. On the morning of Jan. 23, after investors absorbed the company’s results and guidance, GE stock immediately dropped 2%. That’s not a steep drop, but it still may represent an irrational response based on fear of an unknown future.
Finally, it should be pointed out that General Electric appears to be quite reasonably valued at the moment. On a GAAP-measured, trailing 12-month basis, the company’s price-to-earnings (P/E) ratio is 13.7. That’s substantially below the sector median P/E ratio of around 23.
As a result, you don’t have to fear uncertainty like the market tends to do. Under Culp’s leadership, General Electric can start a new chapter and, ironically enough, be even stronger after breaking up.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
