How Will General Electric Stock Trend Following Q2 Earnings?

General Electric (NYSE: GE) is scheduled to report its Q2 2021 results on Tuesday, July 27. We expect GE to report revenues above and earnings in-line with the consensus estimates, driven by a rebound in the overall economic activity, as global Covid-19 vaccination rates continue to rise. We expect the company to navigate well based on the economic recovery over the latest quarter. While we don’t expect an earnings surprise, our forecast indicates that GE’s valuation is $15 per share, which is 12% above the current market price of $13, implying that the stock has more room for growth in our view. Our interactive dashboard analysis on General Electric’s Pre-Earnings has additional details.

(1) Revenues expected to be above the consensus estimates

Trefis estimates GE’s Q2 2021 revenues to be around $18.3 Bil, compared to the $18.1 Bil consensus estimate. GE in Q2 2020 saw a large 25% decline in revenue, primarily due to lockdowns, which had a significant impact on its aviation business (down 44% y-o-y). Now that nearly half of the U.S. population is fully vaccinated, and on the international front, most of the countries have undertaken large-scale vaccination programs, the economic growth has picked up pace. While the U.S. GDP grew 6.4% in Q1 2021, it is estimated to have grown 8.8% in Q2.

GE has also seen a rebound in its sales over the recent quarters, with overall revenue falling 12% in Q1 2021, amid continued headwinds in the aviation business. That said, the situation is expected to reverse going forward. Both Airbus and Boeing plan to accelerate their production of aircraft in 2022. Boeing plans to accelerate its production of 737 MAX (which used GE’s engine) by over 60% to 42 aircraft a month by fall 2022, compared to 26 aircraft per month by the end of 2021. Recently, United Airlines announced an additional 200 plane order of Boeing 737 MAX aircraft, raising hopes of a quick rebound in travel demand and alleviating concerns regarding MAX’s manufacturing shortcomings. This will result in better revenue growth for GE’s aviation business over the coming years. Our dashboard on General Electric’s Revenues offers more details on the company’s segments.

2) EPS likely to be in-line with the consensus estimates

GE’s Q2 2021 adjusted earnings per share is expected to be $0.04 per Trefis analysis, in-line with the consensus estimate. GE’s adjusted net income of $256 Mil in Q1 2021 reflected a 32% rise from its $194 Mil figure in the prior-year quarter. This can be attributed to over 50 bps rise in net margins, partly due to a lower SG&A and R&D expense. Looking forward, as the company sees its sales rebound, especially the aviation segment, the margins are expected to rise. As such, for the full-year, we expect the adjusted EPS to be higher at $0.33 compared to $0.01 in 2020.

(3) Stock price estimate in-line with the current market price

Going by our General Electric’s Valuation, with an EPS estimate of around $0.33 and a P/E multiple of around 44x in 2021, this translates into a price of $15, which is 12% above the current market price of around $13. Other than a Covid-19 recovery play, GE stock also stands to benefit from its focus on reducing its debt. GE’s current debt of around $71 billion compares with a whopping $134 billion figure seen in 2018. The company has sold several of its assets to reduce its debt, and it continues to be on that path. While the company’s debt will remain around $70 billion in 2021, it is likely to see a meaningful decline over the coming years, led by an expected increase in cash flows from its aviation business, and from its shareholding in other companies, including Baker Hughes and AerCap. As such, we believe that GE stock has more room for growth in the near term.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

While GE stock may have more room for growth, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs Roper.

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