General Electric (NYSE:GE) offers “little tangible” evidence right now that bolsters the bullish case for GE stock, according to J.P. Morgan analyst Stephen Tusa. He’s not wrong. GE offered compelling profit guidance beyond 2019, but so far, that ‘s nothing but a “myriad of promises,” as Tusa noted.
But that’s not the point.
It’s been noted before that GE stock isn’t about actual results here and now. It’s about GE’s outlook, and its legitimate prospects of truly turning itself around and igniting a rally of GE stock in the process. In other words, it’s not about where GE is; it’s about where it’s going, and the odds of it getting there.
It’s entirely possible that the current and recent buyers of General Electric stock are seeing something the pros can’t see — or quantify — just yet. That leaves the pros a little bit handcuffed.
Not Etched in Stone
General Motors (NYSE:GM), Lego, Marvel and Apple (NASDAQ:AAPL). All four are turnaround stories, though there’s a more important common element to note. All four turnarounds were also widely unexpected during the throes of each company’s darkest days.
Indeed, in some cases the professional observers couldn’t have been any more wrong. In 2007, Bloomberg’s Matthew Lynn wrote that “The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks,” while technology analyst Rob Enderle suggested in 2003 that “The biggest long-term problem with moving to an Apple platform is that the company is in decline.”
The owners of GE stock should be reassured by the fact that, while there are no guarantees, companies can and do make recoveries that aren’t expected to take shape.
Will GE follow in the famous footsteps of the four aforementioned outfits? Nobody knows for sure. It’s unlikely, however, that CEO Larry Culp would be willing to paint an implausible picture of what lies ahead.
What Lies Ahead
General Electric is, to put it bluntly, a mess. Overleveraged and underperforming, GE has been devastated by the demise of its Power business. The company’s free cash flow was pared back to only $4.5 billion in 2018, and GE plans to burn $2 billion of cash as it restructures itself this year.. GE describes the latter process as a ‘reset.’
After that, it’s “game on,” in the words of CEO Larry Culp. During a conference call on GE’s outlook, Culp explained “Power is in a serious turnaround mode. This is not going to be quick, by any stretch,” but he added that matters “will get significantly better in 2020, and we expect positive free cash flow in 2021.”
GE also plans to carry out more deleveraging, paying down debt by selling the most marketable pieces of itself. Culp added that he’s going to reduce Power’s costs by $800 million.
Tusa just isn’t impressed, pointing to what is “officially the widest gap we have now ever seen between consensus earnings and free cash flow.”
The Outlook of GE Stock
There’s a way both Tusa and the company can be right.
Turnaround stories don’t lend themselves to conventional analysis. Turnaround stories are, by their very nature, a moving target, with a planned 180-degree turnaround from the status quo.
Most companies don’t need such drastic reshaping. Smaller tweaks are relatively easy to see coming and handicap, while sweeping overhauls can end in many different ways and can occur in multiple different time frames. Tusa may not believe that the comeback of General Electric stock can materialize because it’s not yet quantifiable.
There’s another possible reality. That is, Tusa may be tacitly aiming to pick the next direction in which GE stock is apt to move from current levels, while new retail (and even institutional) buyers are plowing into General Electric stock with plans to hold it for the long haul.
Whatever’s in the cards, Tusa isn’t wrong. There’s no tangible evidence of the turnaround, but we can’t expect to see such evidence so early. That usually doesn’t happen .
If you’re inclined to take a shot with GE stock, go ahead and pull the trigger. To that end, know that of the 19 analysts still following the company, ten of them rate GE stock a “Buy” or better. One of them has a price target of $36 per share on General Electric stock, versus Stephen Tusa’s target of $6, which is the lowest of all targets.
Somebody’s got to be wrong.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
