Following a Recent Pullback, General Electric Now Is a Great Buy

Once again, General Electric (NYSE:GE) bears have managed to push down GE stock. And once again, the pullback is unjustified and has created a golden buying opportunity.

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This time, the drop has been relatively minor. Over last week’s trading days, General Electric retreating about 7%. Nonetheless, the decline makes GE shares very attractive heading into the company’s fourth-quarter earnings, which the company will report Jan. 29.

Aviation Won’t Crash

One major catalyst for the decline has been the longer-than-expected delay of Boeing’s (NYSE:BA) 737 Max. A few months ago, the Max, which uses GE’s engines, was supposed to resume flying in February or March. Now it’s probably not going to return to service until the middle of the year.

There are, however, a few important points to keep in mind. First, on Jan. 22, Barron’s reported that suppliers’ “cash burn due to the Max should reverse when the plane flies again.” In other words, GE will get all of the money it’s owed once the Max resumes flying. Secondly, Boeing said it would look to resume production of the plane well before the middle of the year, meaning that GE will likely resume selling engines for the Max to the plane manufacturer within a couple of months.

Further, as I pointed out in a previous column, the profits of GE’s Aviation unit comes from selling parts for its engines and servicing the engines after they’ve been in use. As a result, the financial impact of the Max’s delay on GE is limited.

And despite the Max’s delay, the Aviation unit has continued to post strong results. For example, as I noted early in January, third-quarter revenue for the unit increased 3% year-over-year, while its operating profit rose 3% to $1.5 billion and its backlog surged 20% year-over-year to an incredible $253 billion. Meanwhile, the unit’s outlook has been boosted by a large amount of new orders from Airbus (OTCMKTS:EADSY) as well as from airlines in India and one in Qatar.

JPMorgan’s Big Bear Keeps Blasting GE Stock

JPMorgan analyst Stephen Tusa continues to come up with new arguments about why GE is tremendously overvalued. Most recently, Tusa wrote that Aviation’s defense business has performed below expectations. But the defense business only accounts for 5% of GE’s total revenue.

Moreover, the unit continues to win huge contracts. In November, the company received a $1.3 billion deal from the U.S. Department of Defense to provide 1,700 plane engines. And as InvestorPlace’s David Moadel noted, last February, the company received a $517 million contract to provide helicopter engines. Finally, the unit is developing multiple systems for drones which is certainly a growth area for the Pentagon. Although I think GE’s defense business could decelerate due to budget cuts over the long term, the business will not meaningfully hurt Aviation, let alone GE stock.

Tusa also cited pricing pressures that he believes are weighing on GE’s Power unit, due to reduced demand for electricity from coal plants. But worldwide demand for electricity is actually rising. And, as I’ve pointed out in the past, that trend should accelerate as new electricity demand drivers, including electric cars and data centers, become more widespread.

Given these realities, the Power unit, whose backlog rose 4% year-over-year in the last quarter, should continue to improve going forward.

Positive Reviews Continue to Roll In

Before the market opened on Jan. 23, Morgan Stanley analyst Joshua Pokrzywinski upgraded GE stock to “overweight” and raised his price target on the shares to $14 from $11. The analyst cited lower risks posed by the company’s Power business, along with the reduced threats of its pension and long-term care liabilities.

Also more upbeat on GE’s financial position is Nejat Seyhun, the Jerome B. & Eilene M. York Professor of Business Administration and Professor of Finance at the University of Michigan’s Stephen M. Ross School of Business. He told InvestorPlace General Electric appears to be addressing the company’s recent issues.

“[GE] has taken a number of steps to streamline the firm, selling assets and reducing its liabilities by about $9 billion,” Seyhun told InvestorPlace in an email. “A particular concern for the market is GE’s pension benefit obligations, highlighted by Harry Markopolos in August 2019 as being underfunded [by] about $30 billion. Thus GE’s recent actions appears to be addressing these concerns as well, by reducing its pension benefits.”

The Bottom Line on GE

The Aviation unit is still performing well and relief may be on the way. What’s more, the Power unit is continuing to improve and the broader company’s financial situation is strengthening. To me this means that there is no justification for this recent share-price retreat.

As a result, investors should buy General Electric stock now.

 As of this writing, Larry Ramer owned GE stock. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/recent-pullback-buy-ge-stock-now/.

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