24/7 Wall St.

General Electric Co. (NYSE: GE) is still the largest of the core conglomerates, outside of Berkshire Hathaway. In fact, it is more or less the same size by market cap as 3M, Honeywell and United Tech combined. Now that shares have run so much higher, and now that the valuations have started to play out in a post-financial GE, some analysts are beginning to hint that perhaps GE is fairly valued — maybe even overvalued.

While this may sound like a bash of GE, it is not. The consensus analyst price target for the stock still implies almost 10% upside from Monday’s closing price — or over 12% if you include GE’s 3% dividend yield. On top of that, there is the notion that GE will be buying back billions and billions worth of its stock.

The impetus for this review of a more cautionary view is because Cowen’s initiated coverage of General Electric with a mere Market Perform rating on Tuesday. That sounds harmless enough, until you look at the $29 price target, which is more than a dollar lower than the $30.12 close of Monday.

Then we have to consider that JPMorgan has issued a much more serious analyst call on GE, with an Underperform rating and a downside price target of $27.

24/7 Wall St. took some additional analyst notes from recent calls as well to see what the real views for GE look like, without the bias of the flurry of analyst calls right around earnings.

Cowen’s Guatam Khanna voiced some concerns over GE’s valuation. Despite its portfolio transformation that moves its earnings toward the industrial segment, the gains of 15% may be harder to pull off continually through 2018.  Khanna said after evaluating the $1.99 earnings per share (EPS) target for 2018:

We conclude that General Electric is unlikely to meet the implied organic industrial EBIT targets, as mix pressures at Power & Aviation and cyclical pressures at Oil & Gas & Transportation mitigate gains elsewhere. The guided Alstom accretion ($0.15 to $0.20), while plausible, is a lower conviction case, as Alstom’s order book atrophied in the period while the General Electric acquisition was pending.

The current view is that GE is valued at 17.1 times consensus 2017, while 2017 and 2018 street estimates drift lower. Cowen does note that it is below consensus on its view. Cowen’s report suggested that 56% of 2015 industrial EBIT was from Power & Aviation and 21% from was from oil, gas and transportation. Another 24% comes from other verticals.

General Electric’s stock has outperformed the industrial sector and trades at a premium to industrial peers. Cowen noted that GE went from an underowned stock to one that now has to exceed estimates in order to sustain its premium valuation.
24/7 Wall St. looked elsewhere for other recent analyst calls as well. They lean toward caution, but there is still much upside expected in some of the recent calls.

On May 31, GE was reiterated as Equal Weight with only a $31 price target at Morgan Stanley. The firm noted that a visit in Beijing with GE’s management in China showed that health care over there was about 6% of sales and that the health care market has inflected back to growth after a flat performance in 2015.

One June 4, S&P reiterated its Buy rating but it has a much higher $38 price target. Despite being positive as a whole, S&P’s report noted:

We see EBITDA margins under pressure from the lower oil and gas revenues as well as the overall portfolio restructuring, but we see improvement in 2017. Industrial business margins will expand on cost containment and higher fixed cost leverage on increased revenues.

Late in May came a report from Daiwa Capital Markets (U.S.). The firm initiated coverage at Neutral and with a $30 price target. The firm’s report said:

We are initiating coverage of General Electric Company with a Neutral rating and $30 price target. GE’s digital initiative, in our view, will be the next catalyst for the stock as it helps the company grow its service revenue and improve margins. However, GE is currently investing heavily in the initiative, thus limiting any significant contribution to the bottom-line through 2018. The Alstom acquisition is a good fit, expanding GE’s addressable market and footprint within energy, the full benefits of which will be seen in 2018 and beyond. In the interim, GE participates in cyclical end-markets that are displaying mixed results. At 19x forward P/E, we find the stock reflecting the favorable portfolio decisions but not cyclicality inherent in the business, underscoring our Neutral rating.

One thing that may drive interest is that Chairman and CEO Jeff Immelt recent spent quite a slug of money buying up GE shares.

Prior to Immelt’s acquisition of shares, JPMorgan effectively said that it was time to sell GE. That call was covered in detail at the time, and it included a $27 price target.

Between the JPMorgan call and the end of May came a report from William Blair. That firm reiterated an Outperform rating and $38 price target. It was looking for GE’s Digital Meeting on June 23 to be the start of GE’s next leg of outperformance, aided by notably stronger sales and earnings growth in the second half of 2016.

Tuesday’s reaction mostly ignored the Cowen rating. GE shares were last seen up 0.5% at $30.28. Its consensus analyst price target is $32.79, and its 52-week range is $19.37 to $32.05.