New catalysts continue to emerge for General Electric (NYSE:GE) and GE stock. Despite the fact that several vocal Wall Street analysts continue to ignore or downplay these catalysts, GE’s outlook is definitely improving.
One of the latest and most impressive green shoots for GE stock came at June’s Paris Air show, when the company received $55 billion of new orders, versus just $31 billion in 2017.
JPMorgan analyst Stephen Tusa, the most famous of the GE stock permabears, called the orders a “smokescreen” meant to hide serious problems of GE’s Aviation unit. He also called the company’s performance at the show “on net, more negative than even we were thinking when it comes to the aviation debate.”
As the main justification for that startling statement, the analyst cited his calculations which showed that the “normalized cash flow” of the Aviation unit, excluding deductions and R&D, had dropped year-over-year. He also noted that the company had to redesign its new engine, the GE9x.
A Closer Look at GE Stock
That’s probably the first time in history anyone has called $55 billion of orders for a single company “a smokescreen.” I think that the high dollar figure and the nearly 80% jump in the unit’s orders over two years are definitely not a smokescreen. Instead, they are very strong evidence that the unit is doing quite well and is benefiting from tremendous demand.
Citi analyst Andrew Kaplowitz,who attended the air show, reached a similar conclusion, saying “The business does seem to be operating on all cylinders.“
Barron’s pointed out that “the bears low $30 to $40 billion valuation for GE aviation is predicated on adjusting company reported earnings and cash flow numbers,” while ” the bulls $80 to $100 billion aviation valuation takes reported numbers at face value, then uses valuation multiples for similar companies.”
I’m not an expert on financial analysis, but I would suggest relying on the more straightforward calculations of analysts who are bullish on General Electric stock.
After all, Tusa in November cut his price target on GE stock to $6 (it’s now trading above $10). The notes of Tusa and other prominent bears also sparked widespread fears that General Electric stock would be felled by bankruptcy, but another prominent bear, Gordon Haskett’s John Inch, told Yahoo Finance, in an article published on June 13, that GE was “highly unlikely” to become insolvent.
Moreover, the fact that GE has surged over 40% in 2019 shows that investors do not really believe that bankruptcy or insolvency is on the table. Despite his admission, though, Inch kept a $7 price target and an “underperform” rating on General Electric stock.
As for the problems with GE’s GE9x engine, Investor’s Business Daily reported that GE had “received more than 700 orders” for the engine. If the issue with the engine was very problematic, airlines would not have ordered planes powered by it.
I would suggest relying more on the airlines that are extremely knowledgeable about airplanes and have studied the engine than on Tusa. Moreover, Citi called the engine’s setback “teething issues,” indicating that they aren’t very serious
Other Catalysts for GE
On June 21, Bloomberg reported that a consortium led by GE and China’s Power Construction Corp. had won a $4 billion deal to build a hydropower plant on the border of the African nations of Zimbabwe and Zambia.
The deal shows that GE remains in China’s good graces, despite the U.S.-China trade war. By partnering with Chinese companies, which have many ties in Africa, GE can win lucrative deals there. Moreover, the deal suggests that developing countries are looking to build power plants and increase their supply of electricity. All of these positive catalysts will improve GE’s results and lift GE stock in the process.
Meanwhile, in the developing world, as I’ve written previously, demand for cannabis and electric vehicles should increase electricity demand, forcing utilities to invest in their infrastructure.
One of the more recent entities to recognize this trend is research firm Morningstar, which added that the proliferation of data centers will also be a meaningful driver of increased electricity demand in the U.S. According to Axios, the firm stated that, “the most successful utilities must attract these industries by investing in grid expansion, smart networks, safety, reliability, and renewable energy during the next decade.”
As utilities make these investments, demand for the products and services offered by GE’s Power and Renewables units will inevitably increase, boosting GE’s results and General Electric stock.
The Bottom Line on GE Stock
Despite the negativity of Tusa and other bearish analysts, it’s clear that GE’s aviation unit is indeed a strong positive catalyst for GE stock. Other positive catalysts for General Electric stock include the company’s continued strong partnership with China and increasing electricity demand in both developing and developed countries.
As of this writing, the author did not own shares of any of the stocks mentioned.