In recent weeks, the revitalization of the airline sector has greatly improved the medium-term outlook of General Electric (NYSE:GE) stock.
In a May 25 article, Bloomberg reported that the U.S.A’s top three airlines made optimistic comments about their recoveries.
Delta’s (NYSE:DAL) president said that the rebound has been stronger than it had anticipated.
United (NASDAQ:UAL) thinks that it will enter the black, excluding a number of items, in the third quarter and predicts business travel will meaningfully recover in the fall.
American Airlines (NASDAQ:AAL) sees “encouraging signs” in business travel and long overseas trips.
Taken together, the article shows that air travel is rebounding sooner and faster than the conventional wisdom had suggested at the beginning of the year in the wake of the vaccine rollout.
Even more positively for the longer term outlook of GE stock, the European manufacturer said it expects to produce 64 of the planes every month within two years.
GE is very well-positioned to benefit from the revitalization of travel with its huge airplane engine business.
In the medium term, as more countries accelerate the dissemination of vaccines, global air travel should start approaching 2019 levels, greatly boosting the company’s large Aviation unit and meaningfully lifting GE stock.
Exciting New Developments for GE
On June 17, GE announced that it would build 55 sets of wind turbines for India’s Continuum Green Energy India.
The deal suggests that GE’s onshore wind turbine business is building momentum in India, a very large, important market. This momentum could very well spread to other major Asian markets in the medium-term and long-term.
In a separate development, GE reported that it would partner with European tech company Safran to develop airplane engines that increase fuel efficiency by more than 20%.
The engines under development are also expected to be compatible with renewable fuels, including hydrogen.
Although these engines aren’t expected to be deployed until around 2035, optimism about them could greatly lift GE stock within three or four years.
The Excessively Bearish Analyst
JPMorgan’s Stephen Tusa correctly called the weakening of GE several years ago, but he’s incorrectly held onto his negative view of GE even as the conglomerate has been completely revitalized under CEO Larry Culp.
In April 2019, for example, Tusa lowered his rating on the shares to “underweight” from “neutral” and reduced his price target on the stock to $5 from $6.
“We believe many investors are underestimating the severity of the challenges and underlying risks at GE, while overestimating the value of small positives,” he wrote at the time.
He contended that the fundamentals of the Aviation unit were weaker than many believed and called out weakness at the Power and Renewables units.
Tusa also worried about the cash consumption of GE Capital Services and claimed that the conglomerate was vulnerable to liquidity issues in the event of a recession.
By February 2020, less than a year later, GE stock had climbed close to $13, versus Tusa’s price target of $5, largely on the strength of its aviation unit
The company weathered the recession, which included an unprecedented hit on Aviation, without any liquidity problems.
Two years after the analyst’s warnings about the weakness of the Power and Renewable units, they have clearly both strengthened tremendously, as its onshore wind unit achieved record volumes despite the pandemic last year and Gas Power’s orders doubled YOY in Q1.
Also last quarter, Power’s margin rose 1.1 percentage points and its loss narrowed to $87 million from $131 million during the same period a year earlier.
Despite continued challenges from the pandemic, for 2021, the company expects low-single-percentage-digit industrial revenue growth and industrial free cash flow of $2.5 billion to $4.5 billion. And that guidance likely underestimates the big boost that Aviation will get this year.
Two of Tusa’s biggest problems in assessing GE stock in recent years, are his tendency to overemphasize and exaggerate the company’s relatively small challenges while ignoring or downplaying its huge improvements and opportunities.
And recently, he’s been at it again. Specifically, in a June 2 note to investors, Tusa highlighted the weaker-than-expected sales of the company’s defense business. The business, however, only amounted to 5% of GE’s revenue in 2019.
As Barron’s put it recently, “The military business, however, isn’t a make-or-break issue for GE stock. Commercial aviation is.”
Moreover, GE said in May that it still anticipates that the sales of its defense business would rise by nearly 10% this year.
Despite Tusa’s poor record on GE stock in recent years (as of June 2, he still bizarrely had a $5 price target on the name) and the relative unimportance of the defense unit to the conglomerate’s outlook, his latest bearish note appears to have reversed GE’s positive momentum.
From May 12 to June 1, the shares climbed to $14.15 from $12.82. Since June 2, they have slipped below $13 again.
The Bottom Line on GE Stock
The market appears to be putting way too much weight on Tusa’s view of GE, while ignoring the conglomerate’s strong, positive catalysts.
That situation, in turn, has created a great buying opportunity for longer-term investors.
On the date of publication, Larry Ramer held a long position in GE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Ford, Exxon, and Snap. You can reach him on StockTwits at @larryramer.