General Electric Co. (NYSE: GE) has seen so much turmoil that many investors simply don’t know what to think of the company or how to evaluate it. With earnings still a week away, there are several issues to consider here before that time.
GE has become a range-bound stock, in a range of $8.00 to $9.50 a share, since mid-August after having spent many months mostly between $9.00 and $10.50.
With its most recent earnings report in July, GE executives lowered the likely cash-burn expectations from the GE power business. Baker Hughes is already reverting to “a non-GE Company,” and GE’s Biopharma unit is in the middle of a review to be acquired by Danaher. All this is culminating under a report in recent months by Harry Markopolos who has questioned GE’s, accounting and opined that GE is short of working capital.
To make a further view of the company even more complicated, GE recently said that it plans to prepay roughly $4.5 billion of pension payments over the next year and will offer lump-sum buyouts to about 100,000 former employees. This move is targeting a reduction in GE’s net debt and is expected to lower GE’s underfunded pension deficit by as much as $8 billion.
Unfortunately for GE shareholders, the company faces potential costs of more than $1 billion of jet engines thanks to the grounding of Boeing’s 737 Max fleet.
CFRA still carries a Buy rating on GE shares. CFRA sees its ongoing sales down about 4% this year and sees any strength in oil and gas offset being weakness in the Power unit. The firm pointed out that its backlog rose 11% to $396.5 billion at the prior quarter but saw that total orders were down 4% on asset sales. While power orders were down big, they were shown to be up 2% on an organic basis, and aviation orders last quarter were down 10% while health care orders were down 2%. Renewable revenues were up 35% and oil and gas orders rose 11%. With organic revenues up an expected 1% in 2020, CFRA sees EBITDA margin sagging on its slowdown in Power and as it continues to transition away from finance. CFRA sees GE’s EBITDA margin as 9.9% in 2019 and 12.4% in 2020 with an expectation that GE will take more restructuring charges over out as far as 20201.
Credit Suisse, which has a Neutral rating, is focused on the long-term care (LTC) review with a proprietary insurance model while also keying in with the firm’s teams that cover aerospace and defense and also alternative energy. Its own forecast is for minimal LTC funding requirements, versus about $4 billion as investor expectations and about $18 billion as referenced in a GE short seller report. A note from Credit Suisse thinks a better understanding of the LTC liabilities could set a floor on its shares and provide some uplift on the quarter, but the firm thinks visibility into improving absolute free cash flow generation will be required to drive GE’s shares above its own expectations.
After GE’s prior earnings report managed to beat consensus expectations, the independent research outlet Argus maintained its Buy rating with a $13 target with its latest results and pointed out that the new CEO’s progress will result in higher earnings and higher multiples ahead.
On October 10, Deutsche Bank maintained its Hold rating and lowered its target to $9 from $11.
Morgan Stanley was bearish on GE’s aviation orders on October 4, noting that the aviation unit offers far less growth with greater risk at the current time. The analyst there also sees the aviation unit worth only about $30 billion rather than some of the more optimistic estimates of as much as $100 billion.
Barclays maintained its Buy rating on GE on October 3, but the firm lowered its target to $12 from $13. And Credit Suisse (prior to the above note) had trimmed its target to $11 from $12 with its Neutral rating on October 3.
It’s still a week or so before GE reports earnings and analysts may keep adjusting their estimates ahead of the report. The Refinitiv consensus estimates for the quarter and periods ahead are as follows:
- Third-quarter 2019 at $0.11 EPS (down from $0.14 a year earlier) and $22.9 billion in revenues
- Fourth-quarter 2019 $0.16 EPS (down from $0.17 a year earlier) on $26.2 billion in revenues
- Full-year 2019 $0.58 EPS (down from $0.65 in 2018) on $94 billion in revenues
- Full-year 2020 $0.63 EPS on $93.7 billion in revenues
Shares of GE were trading down 1.3% at $8.85 midday on Monday. GE has a 52-week trading range of $6.40 to $12.32, and its consensus target price from was last seen at $10.11.