BofA Upgrades GE On 'Improving' Free Cash Flow Trajectory

General Electric Company GE shares gained 9% on Wednesday morning following a big fourth-quarter earnings report, and the industrial giant got its second major upgrade in a week following the report.

The Analyst

Bank of America analyst Andrew Obin upgraded GE from Neutral to Buy and raised his price target from $12 to $16.

The Thesis

Fourth-quarter EPS of 21 cents and revenue of $26.24 billion both topped consensus analyst estimates, but it’s GE’s cash flow and guidance that impressed the market the most.

Full-year industrial free cash flow for 2019 was $2.3 billion, above the high end of the company’s guidance range of between $0 and $2 billion. GE guided for 2020 EPS of between 50 cents and 60 cents and said industrial FCF for the year will fall between $2 billion and $4 billion, well ahead of analyst expectations of $1.2 billion.

Obin said GE’s cash flow outlook is clearly improving. He also said GE’s fourth-quarter industrial FCF of $3.9 billion was well ahead of his $3.2 billion estimate.

“More importantly, GE’s 2020 guidance for Industrial FCF of $2-4bn (excluding Biopharma results following 1Q19) is materially higher than our prior 2020 FCF forecast of $1.8bn (or $0.7bn adjusted for timing of Biopharma sale),” Obin wrote in a note.

Looking ahead, Obin is now projecting $3.7 billion in 2020 industrial FCF for GE, on the high end of the company’s new guidance range.

Bank of America’s upgrade comes just six days after Morgan Stanley upgraded GE to Overweight due to its improving cash flow outlook.

Benzinga’s Take

Now that GE has seemingly transitioned from having a plan to improve cash flow to demonstrating that it's actually executing that plan, the stock may not be as much of a gamble as it was just months ago. However, even 60 cents in 2020 EPS means the stock is trading at a forward earnings multiple of 20.9, so GE will likely need to continue to grow earnings beyond 2020 to provide significant upside for investors.

GE's stock traded around $12.89 per share at time of publication.

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