Analyst: Normalized GE Earnings Difficult To Forecast

After a brutal 2018, General Electric Co. GE is off to a hot start to 2019. However, one analyst said GE’s long-term outlook remains uncertain.

The Analyst

Bank of America analyst Andrew Obin reiterated his Neutral rating and $11 price target for GE stock.

The Thesis

GE’s fourth-quarter report and positive announcements on divestments have reassured investors about the health of GE’s balance sheet in the near term. Obin said GE stock is now pricing on only about a $10 billion cash requirement for GE Capital compared to a previous range of between $35 billion and $50 billion. Obin also said the restructuring of the Healthcare spin-off should result in an additional $10 billion in incremental cash.

All together, the recent news from the company and its earnings report have likely taken a worst-case scenario off the table for GE and have likely lowered GE’s cost of capital, Obin said.

In 2019, Obin said investors will begin shifting their focus from GE’s distressed balance sheet to fundamental metrics such as free cash flow and EPS. Unfortunately, Bank of America has lowered its 2019, 2020 and 2021 EPS estimates from 77 cents, 90 cents and 98 cents to 59 cents, 79 cents and 89 cents, respectively. Obin says it may take much longer to structurally improve GE’s Power business than some investors are anticipating. That uncertainty makes GE stock too much of a risk after a 35 percent gain year-to-date.

“We recognize that the Power turnaround will not happen overnight with plenty of headwinds to structural profitability in the business, making it difficult to set a reasonable range of normalized EPS or FCF by ’20 post Healthcare exit,” Obin wrote in the note.

Price Action

General Electric shares traded at $10.18 Monday afternoon.

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