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Source: General Electric

Should Investors Buy Into the GE Turnaround Story?

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General Electric released its third-quarter earnings on Oct. 28. GE stock reacted to General Electric’s earnings and rose 4.4 percent on Oct. 28 even though U.S. stock markets fell by more than 3 percent. The stock was trading almost 4 percent higher in early trade on Thursday, Oct. 29.

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Source: General Electric

General Electric's stock news

General Electric posted revenues of $19.42 billion in the third quarter compared to analysts' forecast of $18.73 billion. The company managed to post an adjusted EPS of 6 cents, while analysts expected a loss of 4 cents per share. GE’s aviation segment fared the worst and reported a 39 percent YoY decline in revenues.

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The aviation sector has been hit hard amid the COVID-19 pandemic. The demand for new aircraft has cratered, which has hit aircraft manufacturers like Boeing as well as engine and component suppliers. Earlier this year, Berkshire Hathaway also wrote down the value of its aviation component unit Precision Castparts by almost a third.

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Berkshire Hathaway invested in GE in 2008 and exited the investment in 2017. Last year, Buffett said that GE needs to address its high debt levels. Under CEO Larry Culp, General Electric has been following a transformation plan to lower its debt and exit non-core business.

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GE stock has underperformed

“I think the turnarounds we talked about, even before Covid, at the beginning of the year in both power and renewables are gathering momentum,” Culp said speaking with CNBC. The COVID-19 pandemic has hit GE’s transformation plan and has taken a toll on the company's aviation segment.

GE stock has underperformed the S&P 500 by a wide margin this year. So far, the stock is down over 32 percent in 2020. Over the last five years, GE has lost almost 75 percent of its market capitalization.

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GE's stock forecast

According to estimates compiled by CNN, GE has a median target price of $9, which is a premium of almost 17 percent over the current prices. Among the 20 analysts covering GE stock,13 recommend a buy or some equivalent, while seven recommend a hold.

General Electric stock is a play on the turnaround story. The company is working to reduce the complexities and focus on its core business. Over the years, GE diversified into too many businesses, which increased the complexity.

Looking at the valuation multiples, GE is valued at an NTM EV-to-sales multiple of 1.3x, while its EV-to-EBITDA multiple is 13.6x. The valuation multiples look reasonable. That said, the company would need to implement its transformation plan efficiently before markets can regain confidence in what was once an iconic American enterprise.

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