With all that has been made of General Electric (GE), sometimes the company’s actual products are overlooked. More specifically, its Aviation business continues to grow rapidly, with some believing it could be the catalyst for growth in the coming years. For example, revenue rose 13% in 2018, while profit climbed 20%; total company revenue grew only 3% in 2018. This growth is expected to continue over the foreseeable future, as Airbus and Boeing both have enormous backlogs of orders, and look to GE as an engine supplier.
However, Cowen’s Gautam Khanna seems unconvinced as he maintains a Market Perform rating on GE stock, with a $9 price target, which implies about 6% downside from where the stock is currently trading. (To watch Khanna’s track record, click here)
GE and French aerospace manufacturer Safran have combined to form a joint venture — CFM — to develop aviation products. After the recent grounding and production slowdown of the Boeing 737 Max, Khanna says GE (through CFM) expects to “‘catch up’ on lagging LEAP 1B production,” the engine used in the aircraft (as well as the Airbus A320neo).
Boeing is not going to immediately resume full production of the 737 Max. The company “plans to work with customers to get grounded aircraft into operations, a ‘white glove’ service they normally don’t do,” and pilots may be required to spend more time in the simulator. Khanna says, “these steps will take priority over resuming deliveries, & extend the time to deliver the built aircraft.” This gives GE more runway to catch up on orders, which could be helpful when Boeing is running at full speed.
Aside from its products, GE faces tremendous pressure to continue with its (thus far) successful turnaround. Its most recent earnings report was solid, as investors were happy there weren’t any “bad” surprises. Furthermore, the results showed that the company is facing lower risk that new financial trouble will sprout. Investors are optimistic that, should this continue, the company should be able to dig itself out of the hole it created.
“The major debates on GE’s stock, which won’t be resolved for years, are whether cost cutting & portfolio actions will return Industrial to sustained high FCF conversion, & if Capital will require more cash support,” Khanna concluded
All in all, the recovering industrial giant certainly has the Street divided. Based on 16 analysts polled by TipRanks in the last 3 months, 7 rate GE stock a Buy, 7 recommend Hold, while 2 suggest Sell. The 12-month average price target stands at $11.18, suggesting the stock can rise nearly 17% over the next few months. (See GE’s price targets and analyst ratings on TipRanks)