General Electric (NYSE:GE) is getting lean and mean. And if the company’s recent earnings report is any indication, owning GE stock should begin to pay off for long-term investors. The company posted five cents per share in earnings, beating analysts’ estimates for three cents per share. And the company also beat on the top line posting revenue of $18.3 billion, which surpassed expectations of $18.1 billion.
True, this isn’t your parents' GE. And it bears little resemblance to the house that Jack built (a reference to GE’s long-time and legendary CEO Jack Welch). However, the company that current CEO Larry Culp is steering is starting to look intriguing.
Once A Defensive Stock, Always A Defensive Stock
General Electric was not a growth stock in its heyday, and it certainly isn’t one now. The company operates in defensive sectors such as aviation, healthcare, power, and renewable energy. However, the fact that an investor can easily name GE’s four business divisions is a stark contrast from just a few years ago.
This clarity is being reflected in the GE stock price which has climbed over 80% in the last 12 months and is up 24% for the year. This means that GE stock has outpaced the S&P 500 index over the same period.
Cash Is King
When Culp took the helm, GE was awash in debt. The company that was one of the most recognizable, and beloved, dividend stocks cut its dividend sharply in 2018 as Culp took the helm. Those decisions are never easy, but investors are seeing it pay off
Culp is taking a page out of the playbook he used when he was CEO at Danaher (NYSE:DHR). That is, he’s prioritizing cash flow. Under Culp’s leadership, the company preserved $3 billion of cash as it weathered the pandemic. And in this recent earnings report, the company provided an upward revision of free cash flow (FCF) for the year.
GE is now anticipating a midpoint of $4.3 billion in FCF, up from a midpoint of $3.5 billion in the prior quarter.
One way that Culp has prioritized cash preservation is in the way he has streamlined the company’s operations. The company's largest business is power turbines and that appears to be undervalued right now. However, as noted above, the company is also a player in the renewable energy sector. That business is a long-term play for investors.
A Reverse Split Is Coming
In June, General Electric announced a 1-for-8 reverse stock split. This means every eight shares of GE common stock issued and outstanding will combine into one share. This includes those shares held as treasury stock. General Electric’s float will drop from around $8.8 billion to approximately $1.1 billion.
The merger will take effect after trading closes on July 30. Starting on Aug. 2, the merged shares will begin trading at their adjusted basis. This is a logical next step for the company after it has spent time divesting itself of some business units.
"The reverse stock split will better align GE’s number of shares outstanding with companies of our size and scope,” said Carolina Dybeck Happe, GE’s senior vice president and chief financial officer. “It also marks another step in GE’s transformation to be a more focused, simpler, stronger high-tech industrial company.”
GE’s Turnaround Is In The Early Innings
Analysts are forecasting a 10% increase in GE stock over the next 12 months. However, after delivering a solid earnings report, the company may have its stock reevaluated. The dividend will remain unchanged at just one cent per quarter. However, with Culp prioritizing cash flow above all else, it’s hard to imagine that increasing the dividend won’t become a priority once it’s practical.
GE is a turnaround story that is still in the early innings. So far, it’s going about as well, if not better, than could be expected. The company is clearly earning back the trust of institutional investors. And that means that retail investors should find that owning shares of GE stock will be a sound investment.