Hold the phone.
That’s what Wall Street is telling General Electric (GE) following a surge in its stock price since the beginning of the year. While shares surged 35% between January and February, the stock has plummeted 16% from February’s highs. Investors had been more than happy with the company in the first eight weeks of the year, as restructuring efforts are showing promise. But now Wall Street is back to being concerned and CEO Larry Culp recently said the company is expecting “significant” challenges to cash flow this year, undoing the momentum after many investors thought the company had turned a corner.
Dray says that the “commotion that drove the sharp intra-day selling on Mar-5 was Mr. Culp’s acknowledgement that industrial free cash flow would be net negative in 2019, implying a steep deterioration from positive $4.5 billion in 2018.” But the analyst believes this shouldn’t be a surprise, recalling that Culp said was “unable to explicitly rule out the possibility of seeing negative free cash flow (FCF) in 2019” during his 4Q18 call.
Unsurprising by the announcement, Dray says it is important that Culp “reiterated his forecast for industrial FCF to grow substantially in 2020 and 2021,” as issues are resolved. Dray believes investors should “not be valuing GE on 2019 FCF,” even though “the acknowledgement of a negative FCF year is a sobering reminder of the challenges ahead.”
Even with the negative announcement, Dray remains positive as “Mr. Culp reaffirmed all of the other preliminary 2019 guidance metrics that were first disclosed on the 4Q18 earnings call on Jan-31, including for industrial organic growth of low- to mid-single-digits and Y/Y industrial operating margin expansion.” In other words, while some didn’t particularly what was deemed as a surprise, investors should take solace that GE says still remains on track.
All in all, Wall Street is almost evenly split between the bulls and those choosing to play it safe. Based on 14 analysts polled by TipRanks in the last 3 months, seven rate GE stock a Buy, sis recommend Hold, while only one issues Sell. Notably, the 12-month average price target stands at $11.18, marking a nearly 18% in return potential for the stock. In other words, even the analysts that are hedging their bets have some healthy optimism reflected in expectations. (Get TipRanks’ free stock analysis report on GE)
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