We are reaffirming our "buy" rating on General Electric Co. (GE); the new management team, as we had expected, has put the brakes on the steady stream of bad news that came from this industrial icon in 2015-2018, suggests John Eade, an analyst with Argus Research.

CEO Larry Culp replaced John Flannery in October 2018; we think that 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.

While the pandemic has slowed the turnaround, the company is making progress. As expected, GE’s Healthcare segment is experiencing a surge in orders for COVID-19-related products, while Aviation is languishing.

However, Renewables orders are coming in strong, and the long-problematic Power division has turned profitable.

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 again be deeply challenged in 2021. But generating cash will be management’s focus.

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%).

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We think that GE shares are undervalued at current prices near $12, near the high end of their 52-week range of $5-$13. On a technical basis, the shares had been in a bearish pattern of lower highs and lower lows that dated to July 2016.

After forming a double-bottom at $6.70-$6.90 in late 2018, the trajectory had turned positive. However, the stock retested that double-bottom in September and October 2020. Since the retest, the trend has been positive, and the stock is now in a bullish pattern of higher highs and higher lows.

To value the stock on a fundamental basis, we use peer and historical multiple comparisons, and a dividend discount model. 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 better cash flow, higher earnings and higher multiples. As such, we are maintaining our target price of $14

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