General Electric (GE) released its first-quarter report on Tuesday that surpassed both management and consensus estimates, as the industrial giant continues to show Wall Street it is making progress in its turnaround efforts.
GE remains a controversial stock on Wall Street. Analyst targets range from a lowly $7 per share to a lofty $15 per share, so the earnings report is sure to be scrutinized by a host of Wall Street analysts and investors. Nevertheless, William Blair analyst Nicholas Heymann maintains his Outperform rating on the stock. (To watch the analyst’s track record, click here)
Like many on Wall Street, Heymann believes GE’s earnings report “surprised, primarily by not disappointing fundamentally,” which was a fear among investors given recent GE’s past. While the numbers were better than expected, the analyst point out that “GE’s first quarter helped to further diminish the perceived risk that further financial risk or material fundamental shortfalls are likely to now emerge at GE,” which is encouraging sign for a company undergoing major restructuring effort.
Another positive Heymann notes is CEO Larry Culp. On Culp, Heymann says “it is becoming increasingly clear that his enhanced, accelerated, and more dynamic plan to restore GE to fundamental and financial health is not only beginning to work but may be poised to accelerate.” Heymann is among several analysts who have praised Culp, not only for his success with bringing GE’s stock up from the brink, but with increasing transparency and providing a clearer path for investors to follow.
“We continue to believe GE’s underlying intrinsic value (with no value assigned to Power) is somewhere in the range of $14-$16 per share. While we do not have specific share price targets for stocks at William Blair, this now seems to be a highly feasible base case valuation for GE’s share price over the next 6-12 months. If Power’s turnaround plan begins to be viewed as increasingly feasible, realistic, and not exorbitantly costly, we believe a slight discount to our prior sum-of-the-parts (SOTP) valuation discounting Power at 50% of its book value of $17.35-$19.55 per share (perhaps $17-$19 per share) could be a plausible valuation for GE’s shares over the next 12-18 months,” Heymann concluded.
While operating profit from industrial decreased 14% since this time last year and EPS also dropped, investors were happy to see that there weren’t any bad surprises in this report, helping drive share prices up. But while things are looking better for GE internally, the company now faces yet a new, albeit external, challenge to performance — the grounding of the Boeing 737 Max.
The troubles of the 737 Max is well-known by now, but the impact is not isolated solely to Boeing or airlines which use the plane. GE (in a joint venture with French engine company Safran) manufacturers the LEAP-1B engine powering the 737 Max, which means the company generates revenue with increased production of the plane. However, as Boeing announced it would decrease production of the plane this year and grapples with getting existing models back in the air, GE faced small and short-term revenue challenges stemming from lower sales.
Ultimately, the word on the Street points to a sidelined majority on GE stock. In the last three months, GE has landed 7 ‘buy’ ratings vs. 7 ‘hold’ and 2 ‘sell’ ratings. It’s clear that Wall Street is largely divided between the bulls and the fence sitters when it comes to GE. That said, the consensus average price target points to $11.18, or nearly 11% upside potential for the stock. This suggests that by consensus expectations, for now, the bulls win on General Electric. (See GE’s price targets and analyst ratings on TipRanks)