RBC Capital Remains Sidelined on General Electric (GE) But See a “Modest Step Forward”


On Friday, it seems that challenged industrial giant General Electric Company (NYSE:GE) at last took a nice stride away from its streak of recent stumbles- and investors gladly sent shares rising almost 4% in a sigh of relief. The company turned over a first quarter EPS beat for the year, surpassing expectations by 4 cents- all while unveiling a positive curveball: maintaining its 2018 guide. Keep in mind, a reiterated outlook was not a given considering continued weakness in Power and GE Capital segments.

RBC Capital analyst Deane Dray takes this as an encouraging, albeit small comeback move up on back of GE’s “agonizing series of missteps;” an outclass that “defies skeptics.” This financial performance went far “better-than-feared.”

Acknowledging GE nonetheless continues to face “a long and likely bumpy road ahead,” the analyst reiterates a Sector Perform rating on GE stock with a $15 price target, which implies a 2% upside from current levels. (To watch Dray’s track record, click here)

“Much has to go right in its multi-year turnaround plan, and one not-as-bad-as-feared quarterly datapoint does not signal a bottoming. The stock is likely range-bound until the May 23 EPG presentation,” writes the analyst. However, enough went right that Dray boosted his 2018 EPS forecast by a solid 4 cents.

The GE team reaffirmed its full-year EPS guide of $1.00 to $1.07, though Dray understands this is maintained “at the lower-end,” as well as its free cash flow target looking for $6 to $7 billion in 2018. Additionally, General Electric revealed a $1.5 billion reserve for its WMC subprime mortgage segment under DoJ investigation, which is a positive sign to the analyst of an overhang approaching resolution. However, “we are mindful that this settlement is still early in the process,” adds the analyst.

Other positives include the company on track faster than anticipated for its goals of cutting over $2 billion in structural cuts along with cash flows meeting expectations.

Dray continues, “This was only the company’s second positive stock response to earnings since 3Q15, against the backdrop of worsening Power market trends and GE Capital results. Continued solid performance in Aviation and Healthcare was the positive offset. Management has also likely baked in some meaningful contingency in its 2018 guidance to absorb any near-term disappointments. Given the widely-held bear case that a guidance cut was forthcoming, this upside 1Q18 beat & reaffirm spurred a robust 4% relief-rally, outperforming peers by 410 bps on Apr-20.”

Moving forward, the analyst expects GE’s recovery will remain a drawn-out one, with more than $20 billion of divestitures having odds to dominate headline buzz in 2018- which includes Transportation. However, on back of this latest earnings win, the analyst surmises that suddenly the 2018 guide “looks a bit less aspirational and a capital-raise less imminent.” Dray believes this is not enough to become more upbeat just yet- but he approaches GE’s prospects with wary optimism.

TipRanks indicates the industrial empire has Wall Street tossing and turning with caution. Out of 13 analysts polled in the last 3 months, only 2 are bullish on GE stock, 8 remain sidelined, while 3 are bearish on the stock. Notably, the 12-month average price target stands at $14.50, aligning evenly with where the stock is currently trading.