General Electric Shares Jump 11% After CEO Culp Forecasts Positive Cash Flow in H2 2020

General Electric company’s shares surged about 11% after Chief Executive Officer Larry Culp said the industrial conglomerate’s free cash flow would turn positive in the second half of this year, Reuters reported.

The global digital industrial company’s shares ended Wednesday about 11% higher at $6.75; however, the stock is down more than 40% so far this year.

“We are really not waiting for the markets to come back and put the wind we had in our sails,” Culp said. “We know this is going to be a self-help story for a little bit longer,” Culp added the company’s performance in the H2 of the year will set the stage for a positive cash flow in 2021 as well, Reuters reported.

General Electric stock forecast

Ten analysts forecast the average price in 12 months at $8.40 with a high forecast of $11.00 and a low forecast of $6.30. The average price target represents a 24.44% increase from the last price of $6.75. From those ten equity analysts, five rated “Buy”, five rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $8 with a high of $13 under a bull-case scenario and $3 under the worst-case scenario. General Electric had its price target lowered by Independent Research to $6.90 from $7.00 and rated “Hold”.

Other equity analysts also recently updated their stock outlook. Deutsche Bank cuts their target price to $6.25 from $6.51, Credit Suisse lowered their stock price forecast to $7 from $8, while UBS raised the target price to $8.5 from $8.

Analyst views

“While we view Aviation as a best-in-class franchise and see long-term upside on shop visits growth, we see a scenario where engines are cannibalized for available flight hours through 2021 and that maintenance gets deferred until 2022,” said Joshua Pokrzywinski, equity analyst at Morgan Stanley.

“Tail risks from Power, pension, and Long-Term Care are declining as 2021 brings a wall of cash and strong improvement in risk/reward. We see a clear path to 2.0x Industrial Net-Debt/Ebitda in 2020, and as cash flow ramps in 2021 and beyond, we see a broadening set of strategic opportunities.”

Upside and Downside Risks

Upside: 1) LTC could be a lower charge than $1 billion base case expectations. 2) Gas power generation could exceed 25-30 GW net additions per year, highlighted by Morgan Stanley.

Downside: 1) LTC remains an opaque liability that could result in a $9 billion in additional cash funding. 2) Our Global Utilities teams view the annual gross additions to gas power generation as being 25-40% lower than 2019 levels. 3) GE Power may not participate in China growth at historical levels.

Check out FX Empire’s earnings calendar

General Electric Under Pressure After Morgan Downgrade

General Electric Co. (GE) fell to a 2-month low in late July after reporting a Q2 2020 loss of $0.15 per-share, $0.06 worse than expectations, while revenue fell a stomach-churning 38.4% year-over-year to $17.75 billion. The release offered no forward guidance, leading many market watchers to theorize the financial outlook is worse-than-expected at the troubled conglomerate, which has been stuck in an historic downtrend since 2016.

General Electric Historic Downtrend

Years of mismanagement at General Electric came home to roost that year, with uncontrolled debt forcing institutional and retail investors to walk away, following a modest 7-year uptrend that failed to mount the 2000 or 2007 rally highs. Selling pressure accelerated into the end of 2018, dropping the stock to the lowest low since 2009 while 2020’s pandemic-driven downdraft sliced through support into an 18-year low.

The stock is under pressure on Monday after JPMorgan analyst Stephen Tusa withdrew their price target, stating “we are more negative on GE as we turn the corner into 2H20. The company continues to have no official guidance, which in our view implies difficulty seeing 3 to 6 months out, while debt maturities and options resets suggest GE does not see normal until 2024.” He ended with a warning that “the collapse of this forward estimate curve is coming soon.”

Wall Street And Technical Outlook

Wall Street is surprisingly upbeat on General Electric, hanging their hats on a well-documented reorganization plan that’s yet to produce positive results. It’s currently rated as a ‘Moderate Buy’, based upon 6 ‘Buy’ and 5 ‘Hold’ recommendations. Oddly, today’s bearish call marks the first ‘Sell’ recommendation, despite the long-term threat of bankruptcy. Price targets range from a low of $6.30 to a street-high $11 while GE opened the session just 20 cents above the low target.

General Electric bounced in May after undercutting the 2009 low by 3 cents, initiating a critical support test that’s still in progress. Buying pressure has been non-existent since that time, raising odds for an eventual breakdown that could signal the next phase in the iconic company’s demise. Unfortunately, a well-heeled suitor is unlikely to come to the rescue because few profitable companies would be willing to take over the enormous debt load.

General Electric Q2 Loss Widens; Target Price $3 in a Worst-Case Scenario

General Electric Co, a globally diversified technology and financial services company, reported a wider-than-anticipated quarterly loss of $2.2 billion in the second quarter, compared to a loss of $61 million during the same period a year ago, as coronavirus wrecked its aviation business, sending its shares down over 4%.

Following this release, the Boston-based industrial conglomerate’s shares closed down 4.35% at $6.59 on Wednesday, down over 40% year-to-date.

General Electric’s revenue declined 24% year-on-year to $17.7 billion in the second quarter and reported a cash outflow of $2.1 billion from industrial operations. The company also suffered a 44% decline in revenues in its aviation business.

“Narrow-moat-rated General Electric had a difficult second quarter. That was expected. GE’s higher-margin businesses within aviation, healthcare, and gas power were more heavily impacted by coronavirus and were down three times relative to the rest of GE Industrial. While we arguably overly anticipated the revenue pressures, we failed to fully appreciate the magnitude of difficulties management faces in excising fixed costs from GE’s business. To that end, we cut our fair value estimate by about 6.5% to $9.90 (from$10.60 previously), said Joshua Aguilar, equity analyst at Morningstar.

“We now expect adjusted EPS of $0.05 for full-year 2020, $0.47 in 2021, and $0.71 in 2022, as well as industrial free cash flow burn of just over negative $2billion for 2020. Our valuation implies a value of roughly 21 times our 2021 earnings expectations.  Given the unique challenges in the commercial aerospace industry, we encourage investors to look out to next year’s earnings, despite the clear level of macroeconomic uncertainty (which should be appropriately built into an investor’s margin of safety).”

Executive comment

“Our earnings performance was impacted by the ongoing impact of COVID-19 on our businesses, but Industrial free cash flow was better than our expectations and previously communicated range. We made faster progress on elements within our control, including our targeted cost and cash preservation actions,” said GE Chairman and CEO H. Lawrence Culp.

“We’re working through a still-difficult COVID-19 environment, and while it’s too early to predict the trajectory for the recovery of commercial aviation, we continue to plan for a prolonged return to prior levels of activity. Still, based on what we see today and the actions we’ve taken, sequential improvement in earnings and cash in the second half of the year is achievable. We expect to return to positive Industrial free cash flow in 2021. We are accelerating our transformation to make GE stronger and drive long-term, profitable growth.”

General Electric stock forecast

Eleven analysts forecast the average price in 12 months at $8.22 with a high forecast of $11.00 and a low forecast of $5.00. The average price target represents a 24.73% increase from the last price of $6.59. From those 11, five analysts rated ‘Buy’, six analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Deutsche Bank lowered its target price to $6.51 from $7.4, while UBS raised its target price to $8.5 from $8. Morgan Stanley target price is $8 with a high of $13 under a bull scenario and $3 under the worst-case scenario.

We think it is good to sell at the current level and target at least $5 in the short-term and $3 in a worst-case scenario as 100-day Moving Average signals a strong selling opportunity.

Analyst comment

“While we view Aviation as a best-in-class franchise and see long-term upside on shop visits growth, we see a scenario where engines are cannibalized for available flight hours through 2021 and that maintenance gets deferred until 2022,” Joshua Pokrzywinski, equity analyst at Morgan Stanley said.

“Tail risks from Power, pension, and Long-Term Care are declining as 2021 brings a wall of cash and strong improvement in risk/reward. We see a clear path to ~2.0x Industrial Net-Debt/Ebitda in 2020, and as cash flow ramps in 2021 and beyond, we see a broadening set of strategic opportunities,” he added.