GE's Challenges May Be Multiyear, but Opportunities May Be Overlooked

Some companies see their shares do incredibly well after their earnings reports. General Electric Co. (NYSE: GE) shareholders may not feel like they are exactly holding a crown jewel, compared with the good old days when GE was the world’s largest and most dominant conglomerate. Now GE has a very troubling stock price after earnings, it has lost its prestige and invincibility and, frankly, many investors have a hard time understanding GE’s business model.

While GE is facing multiyear challenges and needs to effect a turnaround during a deep recession, its long-term opportunities under new leadership could make it an overlooked sleeper stock that could surprise investors in the years ahead.

The difficulties and threats brought on by the COVID-19 pandemic have been unique and unprecedented. GE had operating troubles already, but the woes of the airline industry took its prized aviation business from shinola to something much worse. The conglomerate appears to be in a position in which shareholders need to wonder how GE will fly out of the storm.

GE’s earnings report for the second quarter of 2020 might have had some tidbits of stabilization to some investors. The bottom line, and what the stock market decided to focus on, was that GE’s cash flow and earnings were in the red. GE is now valued at just $53 billion, and it no longer dominates the conglomerates. Its problems were bad enough that GE even was kicked out of the Dow Jones industrial average, after being the longest-serving member of that index.

GE’s earnings report was covered in more detail after the announcement was made last week, but its adjusted loss per share of $0.15 on revenues of $17.7 billion were down from adjusted earnings of $0.16 per share on revenues of $28.83 billion. Its results compared to the consensus estimates for a loss per share of $0.10 on revenues of $17.12 billion. The worst part of the news was that GE registered negative free cash flow of $2.1 billion in its Industrial businesses during the quarter.

The general feeling that shareholders will have is that GE’s flight path to recovery looks weak. One harsh reality is that GE’s glory days of decades past are gone. Even the most bullish analyst probably would concede that point. It may never come back to anywhere what the company used to be, or at least will take ages to do so. Even superstar CEO Larry Culp is having more than a hard time during a pandemic recession, now that Aviation is in the latrine.

All that said, if GE can get any momentum going and as Aviation gets back to some form of normality, there could be some hidden leverage that propels it much higher in the coming years. And yes, that is plural.

24/7 Wall St. has tracked multiple analyst calls after the earnings report. The company also will be highly dependent on a broader economic recovery, particularly in aviation. GE’s stock fell for three consecutive days, from $6.89 ahead of earnings, for a total loss of almost 12% to $6.06 by the end of the week. Its reaction on Monday has been positive, but not by enough (0.3%) that shareholders are going to feel great.

Multiple firms on Wall Street had a lot to add in here, and some of them remain quite positive, if they are looking out beyond just 2020 and even 2021.

Credit Suisse maintained its Neutral rating, but the firm’s John Walsh cut his price target to $7 from $8. He noted that GE’s complexity remains elevated and its bridge into 2021 remains uncertain, even as several tailwinds and headwinds were sized up, with a focus on trade working capital. The firm sees free cash flow up in the fourth quarter but has less conviction around the third quarter, despite the $2 billion-plus in cost savings.

CFRA maintained its Hold rating, and the target price from Colin Scarola is $6. His view is based on 15 times the firm’s 2021 per-share earnings target but is after it missed earnings with a severe decline in Aviation, with operating losses in Power and Renewable Energy. Yet, the firm believes that GE’s 40% stock decline in 2020 leaves its shares near fair value.

Deutsche Bank maintained its Hold rating on GE but trimmed its target price to $6.25 from $6.50.

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