One of GE’s biggest bears upgraded the stock Friday, but bullish investors shouldn’t get too excited: Shares were only moved to the equivalent of Hold from Sell.
Gordon Haskett analyst John Inch, the one who changed his rating, stopped short of recommending General Electric stock. “We are raising our GE price target to $11 from $7,” wrote Inch in a Friday research report. “In conjunction with the market rally that has boosted the company’s associated peer valuations.”
What has changed for Inch is the valuation of other companies. General Electric (ticker: GE) has four big divisions: aerospace, power, health care, and GE’s finance arm. Wall Street often values the company on a sum-of-the-parts basis, looking at the value of each division and adding them all up. And with the market at all-time highs, GE’s parts look more valuable.
Still, $11 a share is about 15% below recent levels. GE stock closed at a new 52-week high Thursday, one penny higher than the $12.94 shares closed at in late January. For the year, shares have rallied 16%, far more than the S&P 500.
Inch isn’t buying the GE stock rally yet. He still worries about high debt levels, confusing accounting, and what he called a “mediocre to moribund portfolio mix outside of aviation.” That means Inch still doesn’t like the GE Power business. Orders at GE Power fell 30% year over year during the fourth quarter, just reported by the company. There is still more work to do for management to turn the division around.
And GE’s accounting is hardly ever simple. The company sells and services assets that last decades. That makes it difficult, sometimes, for investors to reconcile things such as earnings with cash flow. That isn’t a new risk, but it still nags at Inch.
It sounds like a begrudging upgrade. But the analyst added in his report that “power seems more under control” and profit-margin expansion at GE Healthcare is possible. What’s more, he believes GE Capital, the finance arm, is less risky because the business is smaller. The worst outcomes for investors holding GE stock seem to be off the table.
Looking ahead, Inch expects GE to earn 63 cents a share in 2020 and 70 cents a share in 2021. Wall Street expects those numbers to be 60 cents and 77 cents, respectively.
At 60 cents, GE trades for almost 22 times this year’s estimated earnings. That is a premium to other industrial companies and stocks in the S&P. GE shares trade, however, for less than 17 times estimated 2021 earnings. That is a small discount to other industrials and the broader market.
The valuation set up reflects that GE is a company in turnaround mode. Things are supposed to get better quickly. Earnings are expected to grow 28% between 2020 and 2021.
If they do, the stock should keep outpacing the market, even if shares don’t race ahead by 50%, as they did in 2019.
Inch had the second-lowest target price on Wall Street. J.P. Morgan analyst Stephen Tusa still rates shares the equivalent of Sell and believes shares are worth $5. That means the bull-bear spread on Wall Street remains wide. Target prices range from about $5 to $18 a share. The $13 spread is about 100% of the current stock price, about twice as wide as the typical spread for stocks in the Dow Jones Industrial Average.
Things might be looking up, but GE remains controversial on Wall Street.
GE shares are down 10 cents in premarket trading, falling in line with U.S. stock futures.