So far in 2020, General Electric (NYSE:GE) has picked up exactly where GE stock left off in 2019.
Up 24.8% in the three months from Oct. 1 through Dec. 31, GE has a total return of 4.6% year-to-date — a sign 2020 might be another year of recovery for the beleaguered industrial conglomerate.
While there’s no question GE stock has a lot of momentum on its side, is General Electric’s business strong enough to warrant a second consecutive year of outsized gains?
I don’t think so. Here’s why.
The Analyst Isn’t Keen
This past year didn’t look so great to GE bear Stephen Tusa. In December 2018, the JPMorgan analyst upgraded the company’s stock from “underperform” to “neutral” for the first time in more than three years. Just four months later, Tusa lowered GE’s rating back to “underperform.”
And the entire time, he kept his 12-month price target at $5. GE gained 47% in 2019, closing out the year at more than double Tusa’s target.
Recently, Tusa discussed some of the reasons he’s keeping GE at $5. These include weaker-than-expected results from its defense business, which he sees growing sales at less than 4.5% in the current quarter, well below the company’s guidance of $4.7 billion.
Furthermore, Tusa’s skeptical about the company’s 15% growth for the division in the year ahead: “Bottom line, we struggle to find support for guidance that calls for such growth, especially in the context of flat revenue performance here since 2009, which ranks as worst in class versus the major primes and other tiered suppliers.”
“Further, we see limited supporting evidence for what is consistently highlighted by management as a key support for forward growth at GE Aviation, the most narrowly exposed supplier in the market, heavily weighted to commercial engines, and specifically, Boeing,” Tusa wrote to clients.
In November, I examined the pros and cons of GE’s business and concluded that while there was some good news from the company’s third-quarter results, I saw the glass as half empty.
“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,” I wrote on Nov. 6.
My last General Electric article from September, which focused on the company’s asbestos problems, finished by saying GE remains a terrible investment idea for investors wanting to make a lot of money over the long haul.
Usually, I don’t pay a lot of attention to a single analyst call, but Tusa has been very dialed in about the weaknesses plaguing the company’s business. Until he raises GE’s target price to double digits, I’m not sure I’d be willing to risk buying above $10.
The Bottom Line on GE Stock
My last article about General Electric was in December 2019, when I suggested GE make its one-cent quarterly dividend (down from 12 cents a quarter) a permanent fixture. By taking the capital it spends on dividends and re-allocating to debt repayment, business investment, share repurchases and even the occasional special dividend when free cash flow is flush, the company will be in a better financial position.
For too long, GE has been the home of dividend junkies. If CEO Larry Culp wants his turnaround to work, he’s got to let those investors go.
As for General Electric’s fourth-quarter results, expected after the markets close Jan. 29, I don’t see enough good news to keep the momentum train on track for the remainder of 2020.
However, InvestorPlace contributor Laura Hoy believes the company has an excellent shot of repeating its 2019 performance in 2020. You might want to check out her argument.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.