Can General Electric Win Over Skeptics in Earnings Season?

Earnings season can’t come fast enough for General Electric (NYSE:GE). The company’s stock is range bound and investors are digesting two analysts’ reports on GE stock that range from neutral to bearish.

A large General Electric (GE) sign.
Source: testing / Shutterstock.com

The key variable in both reports is the company’s free cash flow. And that is something that the earnings report will help make clearer.  

This is my first time writing about GE stock since the company conducted its 1-for-8 reverse stock split in August. So, I had to reorient myself to the company’s stock price, which at more than $102 per share as I write this would be nearly $13 prior to the split. 

Reverse stock splits are generally seen as being negative for a stock’s outlook. So, it’s a positive sign that GE stock has held steady after announcing the split. The next step is to show that the company can deliver on its bullish free cash flow (FCF) projections. A strong earnings report would be a significant step in the right direction.

A Tale of Two Analysts 

General Electric has received two recent revisions from analysts’ estimates. Both are taking a close look at the company’s free cash flow. However, they are coming to vastly different conclusions.  

Wells Fargo analyst Joseph O’Dea believes that GE will be able to meet its FCF projections. O’Dea reiterated his rating for GE stock and left his price target unchanged at $107. Essentially, O’Dea believes that GE stock is fairly valued 

However, an analyst from JPMorgan Chase had a bearish outlook on the stock. Stephen Tusa did a sum-of-the-parts (SOTP) analysis and predicted that GE stock price may tumble 47% from its current price. One reason for Tusa’s bearish short-term outlook was the company’s free cash flow (FCF) or lack thereof. 

As Tusa sees it, despite the company’s cost-cutting initiatives, it still has “significant liabilities and little free cash flow to support.” What’s worse as Tusa explains is that the company’s streamlining efforts will have a dilutive effect on fundamental levels of earnings and FCF that are not being priced into the stock at this time.  

Whenever I want to get a read on a company’s free cash flow, I look to see if Mark Hake has written about the company. In this case, Hake has recently written about GE’s free cash flow situation. And he has a much better outlook. Hake believes GE stock could rise as much as 60% from its current price.  

However, Hake acknowledges that his analysis is based on the company’s forecast. And that’s what Tusa believes is too optimistic for the current economic environment.  

Getting Into Growth Mode  

CEO Larry Culp took over leadership of the company at a time when the GE had dug itself a big hole with the analyst community. So far, he has taken the all-important step of not digging the hole any deeper. One way he did this was to jettison the disparate business units that GE had found itself entangled with over the years.  

While I wouldn’t say that analysts are giving GE stock a full-throated buy, overall sentiment is bullish. And that’s because the next step for GE is to show that the business units that remain will begin to deliver revenue. The problem is that those units (e.g., the aviation unit) are front and center in the supply chain crisis.

GE Stock Deserves to Be On Your Watch List 

General Electric must be wondering what it must do to satisfy investors. The company was well into its cost-cutting efforts when the pandemic put some of its growth plans on hold. And the lynchpin of that growth was expected to come from the company’s aviation business 

However, the global supply chain crisis is disrupting the company’s business units. And that is making a wide range of outcomes possible for GE stock. That’s why this earnings report is so critical for investors. For now, I’d put the stock on my watch list, but wait until after earnings to decide whether it’s a buy. 

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.  

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.


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