There is a saying among investors that fundamental analysis tells you what to buy. The problem with General Electric (NYSE:GE) is that the fundamentals are sending mixed messages. This has been the case for GE throughout 2019.
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Still General Electric was one of the best performing stocks of the year, posting a gain of over 50%. But that hasn’t made it any easier for investors to see how GE will perform in 2020.
The Fundamentals are Mixed
The bullish argument revolves around the belief in CEO Larry Culp. It’s fair to say that Culp took over a company that was a mess. He has begun to deliver on his commitment to deleverage the industrial giant and streamline its operations. And this gives GE a tempting valuation. Plus, Culp appears to be inspiring more trust among analysts. This is no small feat considering that prior to Culp’s tenure, GE had a habit of overpromising on results.
The bearish argument is that getting rid of debt is one thing, but generating operating revenue is a different story. And in this regard, GE does face some obstacles. GE was one of the engine suppliers for the grounded Boeing (NYSE:BA) 737 MAX. The grounding of the 737 MAX is currently costing GE $400 million every quarter. That’s hard to overlook. And what makes the issue more daunting is the lack of clarity on when Boeing will be permitted to start building new aircraft.
And Then There’s China
GE does a lot of business with China. According to data from S&P Global Market Intelligence, nearly $23 billion of GE’s revenue came from its Asia region, of which China is a part. That figure is nearly 20% of the company’s total revenue for 2018.
All of this is to say that China may be a benefit or a drag on the stock. It’s still too early to say. The problem is that analysts have been saying that for over a year.
Analysts Predict a Range of Outcomes
One of the tools that investors use to make investing decisions is the advice of analysts. These individuals typically follow a stock closely. The most reliable analysts form their projections based on careful study and analysis. Most stocks have multiple analysts assigned to cover the stock.
Two closely watched measures of a stock’s future outlook are the analysts’ consensus rating and the analysts’ consensus price target.
An analyst commonly expresses a rating in terms of (although not necessarily the exact words) buy, hold, or sell. Investors will also look to see if an analyst has maintained (or reiterated), upgraded or downgraded their rating for the stock.
Of the 15 analysts that rate GE, two have issued sell ratings, six have issued hold ratings and seven have issued buy ratings. The consensus is hold. But keep in mind that hold often is a way for analysts to offer a sell rating without having to anger their contacts within a company. This is why it’s important to see if an analyst’s rating is an upgrade, downgrade or reiteration of a previously held view.
The consensus price target for GE is $10.75 with a range between $5 and $14. If the stock were to hit its consensus price target, it would be down over 8% from its current level. However, if the stock were to hit the bullish $14 target, it would be up over 10%. If the stock were to plummet to $5 it would lose over 50% of its current value.
While most investors are conditioned to treat low- and high-end price targets as outliers, there are still a range of outcomes that suggest the stock may have a difficult time keeping up with its 2019 rate of growth.
It’s Safe to Keep GE on Your Watch List
I have written on GE several times in the last year and have felt that the stock was a hold. I still feel that way. It’s hard for me to get a good picture of what the company will look like going forward. However, Culp appears to be doing a good job of lowering the company’s debt level and that should keep the stock out of penny stock range.
For me, GE is a case of simple math. If the bulls are right, you’ve got a nice upside but can probably do better. If the bears are right, you are taking a loss on a stock that you probably weren’t all that committed to anyway.
I like GE. I just don’t love GE. For me there is still some proving to be done.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
