stock was left out during the recent market rally, a performance gap that begs the question: are things really as bad at the american manufacturer as the figures suggest?
General Electric shares (ticker: GE) are up about 5% from their March lows,
Dow Jones Industrial Average
are up 33%. the
is up 37%. Same stock in the besieged aircraft manufacturer
(BA) – a key GE customer – is 50% above its 52-week low.
In addition, GE stocks are down about 4% on the week. The market has grown by more than 3%.
The average target for share prices among analysts has dropped as Covid-19 has disrupted the economy, but at around $ 8.50 it is almost 40% higher than recent levels. The average Dow Jones stock price is approximately 13% above recent levels.
So why is the stock stuck?
Exposure to commercial aerospace is the best explanation. Warren Buffett dropped a bomb on Saturday when he revealed his
(BRK.A) has sold its entire stake in the American airlines. Berkshire was a huge holder of airline titles, holding between 7% and 11% of the four largest American carriers.
This news hit an area already reeling from coronavirus. About two-thirds of the commercial jet fleet is immobilized worldwide because no one is flying. Passengers passing through government security checkpoints at US airports have declined more than 90% year over year. (US airline stocks, like GE stocks, are also down for the week.)
“No quick or easy fix,” wrote Gordon Haskett analyst John Inch in a research report examining GE’s prospects this week. He is evaluating the stock hold, but he has reduced his target price to $ 5, against $ 9. He calls 2020 “the perfect storm” for the company, saying the stock valuation was based on the idea that the company could generate $ 1 per share in free cash flow.
This objective now seems not to be achieved for a long time.
Not all analysts are as careful as Inch. Morgan Stanley analyst Josh Pokrzywinski estimates that GE’s operations can rebound faster than the industry as a whole because planes that use GE engine technology are “less susceptible to retirement.” GE engines, parked at the moment, will find their place in the sky, stimulating GE secondary market activities.
However, given the uncertainty in aviation, Pokrzywinski understands the recent decline in stocks, but believes the share has dropped enough. It values stocks equivalent to Buy and has a price target of $ 8 for stocks.
The slowdown in aviation is why investors are nervous about stocks, but Inch has addressed an issue that could turn the tide: cash flow. Better free cash flow than expected in the coming months would boost optimism.
It will not be easy. In March, GE management told investors to expect about $ 3 billion in free cash flow in 2020. More than $ 4 billion was expected to come from the aviation industry, but since then management has withdrawn its forecast for the year due to the pandemic.
Today, analysts expect GE to burn about $ 3 billion in cash this year. The thumb is more bearish. The company is expected to burn nearly $ 6 billion in 2020.
Even if the money goes out the door, short-term liquidity doesn’t seem to be a problem. Management worked overtime to fix GE’s balance sheet. And a recent sale of $ 20 billion in assets to
(DHR) makes GE’s financial leverage comparable to that of other US industrial companies.
Something must give for GE actions. Either analysts will be embittered on the name, or investors will return to the battered stocks. If this happens, it could mean a bump for aggressive traders and investors as the US economy begins to reopen.
GE shares are down about 44% since the start of the year, a loss similar to that of other aerospace suppliersBarron’s tracks. The stock rose 3% to $ 6.29 on Friday. The S&P 500 gained 1.7%.
Write to Al Root at [email protected]