GE stock is positioned to add to its record 2019 rally

After several years of declines, General Electric (NYSE:GE) stock finally bounced back in 2019, posting a huge gain of over 50% as new management appropriately executed on cost-cutting and debt-reduction measures, against the backdrop of a steadily improving industrial economic outlook.

Now, on the heels of its best annual performance since 1982, GE stock looks positioned to add to this record rally in 2020.

Specifically, there are three big catalysts which should power sustained gains in GE stock over the next twelve months. First, the industrial economic backdrop will continue to improve amid easing global trade tensions. Second, management will continue to execute on cost-cutting and debt-reduction measures, and profit margin and leverage trends will continue to improve. Third, the valuation underlying GE stock remains cheap, and there is ample room for further fundamentally supported share price gains.

Put together, those three catalysts should provide enough firepower for General Electric stock to rise another 20% or more in 2020.

The Backdrop Will Improve

The first big catalyst which will help power GE stock higher in 2020 is a sustained rebound in the global industrial economy.

Throughout 2018 and for most of 2019, the industrial economy tumbled amid escalating global trade tensions, which sparked geopolitical and economic uncertainty and curtailed capital investment. Over the past few months, however, those escalating global trade tensions have meaningfully de-escalated. As they have, uncertainty has turned into certainty, capital investment levels have rebounded, and the industrial economy has bounced back…everywhere.

This rebound will persist in 2020. U.S. President Donald Trump doesn’t want to upset the egg carton in an election year, because doing so would harm his chances at re-election (citizens like stability). China doesn’t want to upset the egg carton, either, because they want their economy to keep rebounding, which it is doing in the absence of trade volatility. As such, for the next few quarters, trade tensions between the U.S. and China will continue to de-escalate.

As they do, capital investment levels will continue to rebound, and industrial economic activity will continue to perk up. This sustained rebound in the industrial economy will provide a meaningful tailwind for GE stock.

Management Will Remain on Track

Second, throughout 2020, GE management will continue to cut costs, sell unrelated business units and reduce leverage, the sum of which will help keep GE stock on a winning path.

A big part of the 2019 rebound in General Electric stock was new management, led by CEO Larry Culp, doing everything right to get the business back on track. Specifically, Culp shed non-core business units, and used the proceeds to pay down debt and streamline investments into the core businesses. At the same time, he cut back on operating expenses in order to create a viable pathway to sustainable profitability.

All of this will continue in 2020. GE still has a lot of moving parts. Culp will continue to sell some of those moving parts in 2020 and use the proceeds to pay down debt. Leverage reduction will have a positive impact on investor sentiment and the stock’s multiple. At the same time, cost-cutting initiatives will start to bear fruit in 2020, at the same time that streamlined investments into the core airline and power businesses should bring revenue growth back into the picture.

Altogether, GE’s balance sheet and revenue and profit trends will improve in 2020. As they do, GE stock should continue to move higher.

The Valuation Remains Discounted

The third big idea behind the 2020 bull thesis in GE stock is that shares remain discounted relative to the company’s intermediate profit growth prospects.

Thanks to the improving economic backdrop and management maintaining disciplined cost control, General Electric should be able to stabilize and potentially even grow sales at a mild pace over the next few years, while margins should improve as revenues rise on a falling expense base. Assuming this dynamic continues to play out, Wall Street’s consensus 2021 earnings per share estimate of 86 cents seems entirely doable for this industrial conglomerate.

The average forward earnings multiple in the industrials sector is about 16.5. Based on that industry average multiple, 86 cents in 2021 EPS reasonably equates to a 2020 price target for General Electric stock of over $14.

GE stock trades hands around $11 today. Thus, the fundamentals say that shares could rise another 20%-plus over the next twelve months.

Bottom Line on GE Stock

General Electric has its groove back, in that: 1) the industrial economy is back to expanding, and 2) General Electric is doing everything right to maintain healthy and profitable positioning in that expanding industrial economy. As long as those two things remain true — and so long as GE stock remains reasonably valued, which it does today — then this record rally in GE stock will live on.

Author: Luke Lango

Source: Investor Place: 3 Reasons Why GE Stock Could Rally Another 20% in 2020

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