Not long ago, General Electric (GE -0.35%) seemed to be regaining investors' favor. The company posted a big earnings beat in late July, although it did reduce its full-year forecast for free cash flow. As a result, GE stock rallied 29% between mid-July and mid-August.
That momentum didn't last. Worries about inflation, rising interest rates, supply chain chaos, and a potential global recession have caused GE stock to tumble 18% over the past month, wiping out nearly all of the gains it made in late July and early August. That has created a fabulous buying opportunity for long-term investors.
Supply chain woes are temporary
GE stock slumped more than 10% last week alone. A higher-than-expected August inflation reading contributed to the drop. However, warnings from GE's senior management about continuing supply chain problems have also dragged the stock down.
CEO Larry Culp has made it clear that GE's supply chain problems won't disappear overnight. But the company is working hard to address the weak points in its supply chain. And in the aerospace segment, which has had the most trouble hitting production targets, bottlenecks should ease as suppliers rebuild their workforces after making deep cuts to survive the sharp downturn in 2020.
In short, while supply chain issues will continue into 2023, they won't last forever. Long-term investors shouldn't worry too much about temporary headwinds that are unlikely to impact GE's growth or earnings in 2025, let alone 2030 and beyond.
GE isn't an economic bellwether anymore
Growing concerns about how inflation and rising interest rates will impact the economy have also pulled GE stock down over the past month. Many investors view General Electric as an economic bellwether: i.e., that its revenue and profit prospects are closely tied to the health of the economy.
That was true once, but much less so now. Over the past few years, the once-sprawling industrial conglomerate has exited the rail as well as oil and gas industries. It has also scaled back its power business through a series of asset sales. These moves have reduced its sensitivity to macroeconomic trends.
Today, the value of GE's business is heavily concentrated in two segments: healthcare and aerospace. The healthcare business is fairly insulated from broader economic trends; the products and services it sells are necessities.
While the aviation business has traditionally been very economically sensitive, the COVID-19 pandemic disrupted that linkage. Airlines continue to benefit from pent-up demand and are scaling up capacity toward pre-pandemic levels, benefiting GE's engine services business. High oil prices have also sparked renewed interest in upgrading to more fuel-efficient jets, lifting demand for next-generation engines.
As supply chain constraints ease, the healthcare and aerospace businesses should deliver impressive revenue and earnings growth regardless of macroeconomic conditions. That makes the recent sell-off in GE stock look like an even more appealing buying opportunity.
Spinoffs will add to value creation
Revenue and profit growth from the aviation market recovery, rising healthcare demand, and restructuring in the power and renewables businesses would give GE stock substantial upside under any circumstances. But General Electric's plan to split into three separate companies focused on aerospace, healthcare, and energy will magnify that upside.
GE is set to spin off the healthcare unit in early January. As a predictable, high-margin business, GE HealthCare should nab a higher valuation than the full company does today.
The planned 2024 spinoff of GE's power and renewables segments as a new energy-focused business will decouple these highly volatile, low-margin businesses from the aerospace division, which is GE's crown jewel. The remaining aviation business is poised to grow rapidly as supply chain problems fade, capitalizing on pent-up demand. It, too, will merit a much higher valuation than GE stock is getting in the market today.
General Electric has a current market cap of approximately $73 billion, just 10 times the $7 billion of free cash flow that it expected to generate in 2023 as of March. The ongoing supply chain problems may disrupt GE's ability to hit that near-term target. Three years down the road, though, free cash flow (including GE's spinoffs) will likely be even higher. That makes GE stock a great value at its current price.