We are reaffirming our buy rating on General Electric Co. (GE), which undergone numerous transitions, including a change in top management, explains John Eade, and analyst with Argus Research, the leading independent Wall Street research firm.
The new chairman and CEO is Larry Culp, the former CEO of Danaher Corp. (DHR). Mr. Culp is a great hire as the company’s chairman and CEO based on his track record on cash flow and performance consistency.
He has his work cut out for him, given the current mess at GE. But investors are likely to trust him to engineer an eventual turnaround.
The new management team, as we had expected, had been putting the brakes on the steady stream of bad news that came from this industrial icon in 2015-2018. But then the pandemic struck the global economy.
While the company’s Healthcare segment is experiencing a surge in orders for COVID-19-related products, other businesses are languishing, especially Aviation.
We think the company has the cash it needs to survive the crisis, and an able manager to lead it on the other side. Earnings will be deeply challenged in 2020. But generating cash will be management’s focus.
GE will report 4Q results on January 26. The consensus forecast calls for EPS of $0.09 per share, which would be down 57% year-over-year. But EPS of $0.09 would be up 50% sequentially, and the Street right now is also focused on incremental progress.
EPS of $0.09 would also result in full-year profitability for GE, despite the impact of the pandemic on 1H results. Estimates have been rising over the past quarter.
Down the road, we think that GE’s earnings power could be as high as $1.50 per share (implying an operating margin near the industry average of 15%). If we apply an industry-average multiple to this estimate, the valuation is close to $25 per share. That’s a long way off.
In the meantime, we think that GE’s progress under its new CEO will lead to higher earnings and higher multiples. Our target price is now $14, up from $10, to take into account the most recent balance sheet developments.
