General Electric (NYSE:GE) stock is up about 5% in the past month, starting 2020 off strong. When I last wrote about the company in December, General Electric was feeling the effects of Boeing (NYSE:BA) slowing down 737 Max production.

It has since become clear that Boeing may have to extend the production cut beyond the first half of 2020. GE makes the Max 737’s engines for Boeing, so the extended delay in jet production will have an effect on General Electric. But how much?

One analyst, Bank of America’s Andrew Obin, says that Boeing’s further delay will pose risks to GE and a number of other companies. He wrote that investors may underestimate the Max’s impact on secondary and tertiary suppliers.

Obin reiterated his $12 price target and his “neutral” rating. In a note to clients, he highlighted that Boeing’s 737 Max poses as a potential risk for GE during 2020.

Both companies in question — Boeing and GE — will report quarterly and full-year 2019 results on Jan. 29.

Analysts Are Divided

Although Obin is neutral on the stock, particularly with the risks from Boeing, Morgan Stanley analyst Joshua Pokrzywinski recently took a different view on GE stock. He raised his recommendation to “overweight” from “equal weight.”

He also raised his price target to $14 from $11 per share. That implies a 20% upside from today’s share price.

Pokrzywinski believes that the Aviation division at General Electric is a “best-in-class franchise,” while the risk from the extended grounding of the 737 Max appears limited. Risks from the company’s Power unit, employee pensions and long-term care are also declining.

In a move that ultimately boosted shares, he broadly encouraged investors to separate the company’s story from its fundamentals.

For example, he highlighted how GE reduced its risks last quarter both in its pension obligations and its long-term care business. He called this “trimming the tails” of risk. According to him, this means that no large surprises in these areas are likely.

Downside or Upside?

The Morgan Stanley analyst in question had an interesting way of weighing the Boeing-related risks for GE stock.

The loss of the jet production costs GE about $400 million in cash flow per quarter. That is already reflected in the stock price. That means when production resumes, this cash flow will be retrieved.

He said that the downside risk for GE stock is $9 per share. That is about $2.70 below the current share price. But the upside, once production resumes, is $17. That is a gain of almost $5.30 per share. Here the upside gain compared to the downside risk is $5.30 to 2.70. That is almost a 2-to-1 gain of return over risk. Therefore, the return is almost 100% better than the risk. He finds those are favorable odds.

Furthermore, he says that 2020 will be a volatile year for GE’s earnings. So looking to 2021, when the engine production is in full swing again, he expects that GE will earn 87 cents per share.

That puts GE stock on a forward (2021) price-to-earnings ratio of just 13 times earnings. That will seem cheap near the end of 2020. Investors will start focusing on 2021 earnings then.

He believes that a 15 times multiple at that time will start pushing GE stock toward his $17 target price.

Pros and Cons of Each Report

Both Obin and Pokrzywinski make good points. However, I will point out the flaws in both of their arguments.

First, the Bank of America analyst may indeed be too bearish. There is no question that GE will resume production of the Boeing engines at some point, probably this year. Most of the bad news is already implied in the stock price. So when production begins again, GE stock will almost certainly rise. The real questions are when production will start and how high the stock will rise.

On the other hand, the Morgan Stanley analyst may be too bullish. First, there is no guarantee that the Max engines will go back into production this year.

Second, I pointed in my article last month that GE has taken advance payments from Boeing. This will cost more cash flow even when the Max production begins.

Third, and probably most importantly, the jury will still be out on the Max jet even after it goes into production. What if people decide they do not want to fly on that plane?

For example, Delta Air Lines (NYSE:DAL) has no exposure to the 737 MAX jet. What if people, en masse, decide to only fly on non-Max airlines like Delta? Boeing could be forced to slow production more than expected, or even worse.

So, there is some risk behind the Morgan Stanley analyst’s bull case.

The Bottom Line on GE Stock

I suspect the truth lies somewhere in the middle. GE stock is likely undervalued at this price. But it may not reach the $17 level for a long time.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial.