Why Credit Suisse Sees GE’s Sell-Off as a Big Opportunity

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General Electric Co. (NYSE: GE) has severely underperformed the markets this year, with the stock actually down over 13% year to date. However, one key analyst believes that the bearish sentiment surrounding the stock may now be overstated and, in fact, the current price level offers a great buying opportunity.

Credit Suisse has an Outperform rating for GE and a sum-of-the-parts price target of $33, implying upside of 20.5% compared to the previous closing price of $27.38. The firm points out in its report that the risk/reward is starting to look more interesting and that the bear points may now be overstated — including the risk to its dividend.

The brokerage firm removed GE from the Focus List back in November 2015, but 18 months after the fact, Credit Suisse believes that the pendulum of investor sentiment has now swung too far in the opposite direction. The firm thinks that GE is not a “broken company,” although it might be somewhat misunderstood, and as a result the current share price represents an attractive entry point.

In terms of GE’s topline growth, Credit Suisse commented in its report:

GE’s organic growth profile seems under-appreciated by investors. The company’s organic sales growth outstripped most EE/MI peers in recent years, and this pattern has continued into 2017. Equipment orders were weak over the past 18 months, but the company’s long-cycle nature means that it will naturally see a turn in such factors later than most industrial companies, who have shorter-cycle business models. Short-cycle trends have improved over the past 9 months, and we expect GE’s orders to improve over the next 9 months.

The firm pointed out that GE’s segments have shown fairly healthy operating leverage in recent years. The quality and quantity of restructuring charges have increased, which, alongside lessening of mix headwinds from new product launches and improving Alstom profits, should mean that industrial margin expansion accelerates from here. Credit Suisse continued by saying:

GE’s segments have behaved with normal operating leverage – when their sales grew, margins also grew, except for those segments affected by Alstom integration. … Similarly, in the first quarter of 2017, GE’s sales & gross margins grew, unlike many EE/MI companies, which indicates that its operating leverage is fairly robust.

Finally, the firm thinks that concerns surrounding the dividend are overblown. GE industrial free cash flow (FCF) is expected to reach about $7.5 billion in 2017, against an estimate dividend payout of roughly $8 billion. However, additional cash flows should accrue from GE Capital ($1.8 billion of steady FCF) and from GE-BHI (over $2 billion in net income in 2018, with no net debt), and the dividend cash payout is likely to shrink even as dividend per share rises (due to falling share count), according to Credit Suisse.

Shares of GE were last seen up 1.2% at $27.69 on Thursday, with a consensus analyst price target of $32.14 and a 52-week range of $27.10 to $33.00.