General Electric (NYSE:GE) announced its third-quarter results on Oct. 30. They were much better than expected, sending GE stock shooting higher. Up about 52% year-to-date, a good chunk of those gains came in the past week.
That said, it’s important to remember that despite delivering a positive earnings surprise for the third consecutive quarter, the GE stock price is still down 3% since CEO Larry Culp was appointed to the top job on Sept. 30, 2018, replacing John Flannery.
How you view the past 13 months and the next 13 months depends on who you talk to.
General Electric Stock’s Glass Is Half Full
Three things stand out from GE’s Q3 2019 report.
First, its Aviation and Healthcare businesses continue to generate healthy profits for the company. The two operating segments had combined profits of $7.5 billion in the first nine months of fiscal 2019, generating a segment profit margin of 19.4%.
This is a good result despite ongoing problems at Boeing (NYSE:BA) with the 737 Max, which has cut into the unit’s order growth. However, thanks to higher engine prices, it has managed to grow its aviation business by 8%.
The second positive from the earnings report is that except for its power business, GE’s industrial activities are growing its revenues and orders at a reasonable pace. Up 7% on an organic basis in the third quarter, GE is starting to look more like the thriving industrial conglomerate it once was.
Finally, the company revised its industrial free cash flow projection for fiscal 2019 from its March outlook of between -$2 billion and $0, to its most recent forecast of anywhere from $0 to $2 billion in positive territory. Furthermore, GE expects its industrial free cash flow to be positive in 2020 with further acceleration in 2021.
At the moment, eight analysts out of 20 have a “buy” rating on GE stock, only two have a “sell,” while 10 give it a “hold.” As for its target price, the average is $10.77, while the highest is $14, providing those long General Electric stock with 28% upside at current prices.
The Glass Is Half Empty
The lowest target price from the 20 analysts covering GE is $5, half its current levels. That comes from GE permabear Stephen Tusa. The JPMorgan analyst believes that it continues to be an underwhelming choice amongst industrial companies.
“At a simplified headline level, there was no smoking gun, though the underlying details show a situation that is far from low risk,” Tusa stated after GE’s earnings.
Tusa went on to suggest that GE’s free cash flow at the high-end of its 2019 projection represents a 2% free cash flow yield, hardly an appealing purchase given the risks that still exist within the company’s various segments.
In the previous section about the glass half full, the aviation business has a lot to do with a positive outlook. Some analysts see the aviation business being worth as much as $100 billion. Tusa believes that the real value is around a third of that.
“Given a myriad of moving parts outside of just historical performance, we believe there is justification for a materially lower equity value and see a business that is closer to its best days being behind it than in front. Our in-depth review of the business suggests a value closer to $30 [billion],” Tusa said in early October.
The analyst believes that GE Aviation is operating at peak performance. He expects future sales to be not nearly as rosy. Essentially, investors are overestimating the division’s growth prospects and underestimating their risks.
This doesn’t even take into account its troubles making money from its renewable energy segment, ongoing pension issues, or the slimming down of GE Capital.
The Bottom Line on GE Stock
As Tusa has recommended, investors would be wise to wait and see what happens to free cash flow in 2020 before jumping into GE stock.
My last article on GE in September, which focused on the company’s asbestos problems, finished by stating GE remains a terrible investment idea for investors wanting to make a lot of money over the long haul.
While there was some good news in GE’s Q3 2019 report, it’s important to remember that its stock is still trading below where it was when Larry Culp took the job. Whether you consider Culp’s time as CEO a success or failure depends on whether you see the glass half full or half empty.
For me, it’s still half empty.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.