When General Electric (GE) releases second-quarter earnings on Wednesday, investors will keep a close eye on what management says, and the degree to which the turnaround effort is progressing. But perhaps more importantly, investors want to see stability and quietness. While GE’s stock is up nearly 30% this year, it has seen several instances of 10% swings, which have undoubtedly caused unease among investors.
The most important factor to consider when looking at GE’s earnings is the rate at which the company is going through its available cash. Given how much some investors have worried about whether GE would face a capital crunch at some point, this factor seems to be the most important one for the company — and many see it not only as the driver of today’s stock-price gains but also the critical determinant of whether GE will succeed or fail in its attempts to restore its reputation as a blue chip industrial leader.
Ahead of the print, J.P. Morgan analyst Stephen Tusa maintains his Underweight rating on the stock, with a $5.00 price target, which implies nearly 50% downside from current levels. (To watch Tusa’s track record, click here)
Indeed, for Tusa, a major element for 2Q will be free cash flow (FCF). The analyst says, “similar to 1Q, FCF headline expectations have moved lower into the quarter, framed by management guidance of negative $1-2 B.” But Tusa believes that a cut to 2Q FCF of this magnitude makes little sense since “most of the structural cash headwinds are 2H weighted.”
Tusa also points to the grounded 737 MAX as another reason why a decrease in FCF is unlikely. As production has declined, the analyst says GE is “likely shifting to highly profitable spare engine sales,” so the “$300 mm drag management is talking about is tough to reconcile.” So while the analyst is bearish on GE, he still believes FCF will actually be higher than the numbers management is expecting.
But this is exactly why Tusa is suspicious. He says, “so far this year, ‘beat and lower’ has been the trend, as Bulls have cut ‘20 FCF estimates by 30% despite the 1Q ‘beat.’” Tusa believes this shows that GE is not actually performing well, but better than Wall Street and company estimates, which continue to be lowered to make their results look better.
All in all, Wall Street generally believes GE is properly valued. TipRanks analysis of 11 analyst ratings shows a consensus Hold rating, with three analysts saying Buy, six suggesting Hold and two two recommending Sell. The average price target among these analysts stands at $10.64, which aligns evenly with where the stock is currently trading. Wall Street needs to see more from the big industrial empire before getting more confident on the story. (See GE’s price targets and analyst ratings on TipRanks)