General Electric (GE) threw a bone investors’ way by releasing guidance framework for 2019, and targets for 2020 and 2021. Though many analysts and investors already had a general idea of the company’s financials for this year and the next few, CEO Larry Culp outlines a bit more specific numbers, including a free cash-flow range of between -$2 billion and $0, and industrial operating margin of 0%-1%. GE is focused on restructuring its business and balance sheet, so while negative cash flow and near-zero margins are usually signs to run away, this isn’t the end of the world for investors, many of whom expect the company to have a completely changed financial profile in a matter of years. RBC Capital Markets analyst Deane Dray is one of those analysts, as he maintains an Outperform rating on GE stock, and raises his price target to $13 (from $12). (To watch Dray’s track record, click here)
Dray says guidance shows GE has “realistic targets (for 2019)…with assurances of a meaningful FCF ramp in 2020/2021.” Not only are the numbers starting to make sense, but Dray is complementary on Culp for “delivering on his pledge to increase transparency at the company,” as the presentation was ”impressive in its breadth of disclosures, with a level of detail that GE has never provided previously.”
While Dray said there “was a lack of many specific quantitative targets beyond the headline EPS and FCF guidance,” he believes this is because Culp wants “to commit only to targets that he is highly confident the business can achieve.” With that, the analyst points to FCF guidance as the “biggest feel-good” item of the presentation, as the company says it expects significant improvement in the years following 2019.
On EPS, the analyst says “investors [should] look past the below-consensus 2019 EPS guidance of $0.50-$0.60,” and EPS in general, as Culp will be “prioritizing cash flows, returns, and growth” instead of EPS targets. But because of this, Dray believes “investors should be braced for more quarterly earnings volatility as Mr. Culp navigates the company through the turnaround.”
General Electric is off to a great start in 2019, following a 2018 to forget. The company’s restructuring plan is in full force, as it continues to return focus to its core revenue operations. Though 2019 will probably show negative FCF and low margins, the Wall Street community is still optimistic on its long-term future. According to TipRanks analysis of 17 analyst ratings, there is a consensus Moderate Buy rating on the stock, with eight analysts Buying, eight Holding and one Selling. The average price target among these analysts is $11.07, which represents about 9% upside. (See GE’s price targets and analyst ratings on TipRanks)