As a longtime and unwavering contrarian, I must respect anyone who dares to stay bearish after a stock rallies. So I will praise JPMorgan analyst Stephen Tusa for hunkering down and maintaining his pessimistic outlook on General Electric (NYSE:GE) stock after GE stock gained 50% last year and reached a 52-week high earlier this month.
While I respect Tusa’s fortitude, I’m reluctant to side with him when he calls GE’s stock price “wrong.” With GE expected to report its fourth-quarter earnings on Jan. 29, Tusa’s perspective could influence how traders position themselves; therefore, I feel it’s worthwhile to examine Tusa’s contention – and whether it’s the market or Tusa who’s “wrong” about GE.
A Low Blow From JPMorgan?
It’s perfectly fine to set a low price target for a stock, but Stephen Tusa’s target is practically a slap in the face. While GE’s shares closed well above $11 yesterday, Tusa’s price target is a rock-bottom $5. By contrast, note that Melius analyst Scott Davis has assigned GE a $15 price target.
Looking out to 2021, analysts’ average earnings per share estimate stands at 81 cents; meanwhile, Tusa’s estimate is a mere 37 cents. Clearly, Tusa will have egg on his face if General Electric continues to go up or if it goes sideways or down moderately, for that matter.
What, then, is this analyst’s thesis? I’ll let him speak for himself:
“A key difference between our negative stance and a more positive consensus is that we view the deterioration in fundamentals at GE as reflecting structural challenges versus something more cyclical.”
“Deterioration in fundamentals”? No offense intended to this esteemed analyst, but the last time I checked, GE beat the living tar out of average earnings and revenue estimates. It reported Q3 EPS of 15 cents versus analysts’ average projection of 11 cents, along with $23.36 billion of revenue versus analysts’ mean estimate of $22.93 billion.
So, unless something jaw-droppingly awful has secretly befallen GE since late October, I would consider it challenging to justify a bearish perspective based on the company’s fundamentals.
Tusa also seems to suggest that GE’s defense business is weak: “Part of the bull case for GE Aviation is strong growth in defense over the next six years… [a] forecast we view as optimistic.” Given the company’s $517 million contract to build engines for Army helicopters, though, I’d personally assess GE’s defense business as robust if not downright outstanding.
Along Came Culp
Along with the other holes in his argument, I feel that Tusa is unduly discounting the Culp factor. CEO Larry Culp has had a transformative influence on General Electric and, as the charts of GE stock show, he has galvanized shareholders. That’s been a welcome change from the era of his predecessor, Jeff Immelt. Most long-term investors would rather pretend that Immelt’s tenure was just a really bad dream.
With GE’s earnings report right around the corner, Culp’s positive influence simply cannot be underestimated. As University of Maryland’s Robert H. Smith School of Business Clinical Professor of Finance, David Kass, explained in an e-mail to InvestorPlace:
“CEO Larry Culp is beginning to turn GE around. There is optimism among investors that GE’s fourth quarter report to be issued on January 29 will show evidence of an improvement in corporate performance with revenues and earnings exceeding most analysts’ expectations. Culp had been lead director of GE before being promoted to CEO. Prior to that he had a stellar record of building and managing Danaher Corp. (NYSE:DHR), a Washington, DC based conglomerate.”
Indeed, in his apparent quest to downplay Culp’s significance, Tusa may have omitted the biggest factor in the GE equation. In an e-mail to InvestorPlace, Paulo Prochno, management professor and assistant dean for Part-Time MBA and Online Programs at the University of Maryland’s Robert H. Smith School of Business, observes that Culp was not only the right man at the right time for General Electric, but a unifying force for an American institution that had evidently lost its way:
“Coming from Danaher, a highly diversified company that resembled the old GE, he is bringing back a core for GE. Not exactly the same core as GE in the past, but one that is general enough to be applied to all business areas within the group: operational efficiency. Danaher was able to develop and keep a system based on operational efficiency that has added a lot of value to their areas; GE seems to be heading in that direction. Larry Culp is acting on multiple fronts, including adjustments in the portfolio of businesses – but his major contribution so far is to bring back a glue to keep the units together. This is still under development, but investors have been optimistic with the future potential of this logic.”
The Takeaway on GE Stock
Despite this notable analyst’s almost slanderous price target, I doubt that any of the bigwigs at General Electric are shaking in their boots right now. Equally undaunted are most GE shareholders, I would imagine. The imminent earnings release will either vindicate Tusa or prove him, to use his own phrasing, “wrong.”
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
