Why GE Stock Still Looks Like a Good Play for Long-Term Investors
The closure of a recent deal will give General Electric (NYSE:GE) the liquidity it needs to ride out the coronavirus crisis without selling additional shares of GE stock.
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Meanwhile, its Aviation unit will struggle in the short-term but rebound over the longer term, and its Power and Renewables units should also perform very well in 2021 and beyond.
On March 31, GE closed the sale of its biopharma unit to Danaher (NYSE:DHR). GE is expected to obtain net proceeds of $20 billion from the deal. That’s a lot of money, even for a huge conglomerate like GE.
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GE CEO Larry Culp hinted that the deal would likely enable the company to weather the storm.
“With regard to our financial position, our company is sound,” he said, adding that the duration of the crisis was unknown.
But he subsequently added that the Biopharma deal would help the company sure up its financial position. He called the advancement of the deal “crucial.”
Reading between the lines, I think Culp was saying that, as long as the deal goes through, the company does not have to worry too much about its liquidity.
The Aviation Unit Will Recover Over the Longer Term
The government’s top experts are now acknowledging a hypothesis I’ve long held: that the coronavirus is seasonal, while its spread is likely to ease tremendously as the weather warms.
Experts now expect the country’s fatalities from the virus to number 80,000-200,000, way down from a previous estimate, even with mass closures, of 475,000. Antibody tests that will identify those who are less likely to catch coronavirus are expected to be released soon and the disease’s spread in the U.S. is expected to peak in the second week of April.
Taken together, I believe air travel will begin to rebound meaningfully at some point in May before accelerating greatly in June.
A similar scenario will likely play out across most of the Northern Hemisphere. Of course, the vast majority of the world’s wealth is concentrated in the Northern Hemisphere.
So as plane travel rebounds in the hemisphere, most of the world’s largest airlines will likely gain enough confidence to resume buying planes in bulk, enabling GE’s Aviation unit to resume its status as a meaningful profit generator and the company’s crown jewel.
And although coronavirus could rear its ugly head again in the fall, Dr. Anthony Fauci, the nation’s top disease expert, recently said that multiple factors, including an expedited vaccine, will leave us much better equipped to deal with the virus then than we were at the beginning of this year. Consequently, I don’t expect the virus to reduce air travel very much again.
The Power and Renewables Units Still Look Strong
After the coronavirus crisis is over, the trends lifting electricity demand are likely to remain very much intact. Specifically, the proliferation of electric cars and data centers will probably continue to greatly increase electricity demand.
Meanwhile, even if oil prices remain extremely low, oil is unlikely to replace natural gas as a generator of electricity on a large scale. That’s because oil prices have historically been very volatile, and it has typically not been used to generate a great deal of electricity. Further, natural gas is also extremely cheap, and it’s much cleaner and has a significantly lower carbon footprint than oil.
Speaking of carbon footprints, lowering carbon outputs is likely to become a high priority for much of the world again after the coronavirus subsides. That, along with the extension of the tax credit for wind energy in the U.S., should be very positive for GE’s Renewables unit.
Within the next couple of years, GE’s Power and Renewables businesses, which together burned $2,5 billion of cash in 2019, will start generating positive free cash flow, a Seeking Alpha columnist contended recently.
The Bottom Line on GE Stock
The Biopharma deal will give GE enough cash to ride out the coronavirus crisis. Meanwhile, the rejuvenation of its Aviation, Power, and Renewables business will boost its results in the longer term, meaningfully lifting GE stock and making it a buy for long term investors.
As of this writing, Larry Ramer owned shares of GE stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
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