General Electric Analyst Targets $1.5B In Industrial FCF In 2021

Just when it looked like management had finally gotten things back on track, the pandemic has made 2020 another difficult year for General Electric Company GE and its investors. Fortunately, one Wall Street analyst says that while GE is taking a big earnings hit, it has several significant offsets supporting its cash flow.

The Analyst: Bank of America analyst Andrew Obin reiterated his Buy rating and $11 price target for GE.

The Thesis: GE CEO Larry Culp spoke at an investor conference this week and said the company’s Industrial segment free cash flow will return to positive territory in the second half of 2020. Obin is forecasting $2.7 billion in free cash flow for GE in the third and fourth quarters, and the stock’s 11% gain on Wednesday indicates the market likely wasn’t expecting positive cash flow in the second half of the year.

Obin is now forecasting a full-year 2020 Industrial free cash flow loss of $1.6 billion, but he expects Industrial FCF to bounce back to +$1.5 billion in 2021.

Bank of America is projecting Industrial EBITDA will drop from $12.3 billion in 2019 to just $4.5 billion this year. However, Obin said lower cash taxes will save $2.2 billion, lower capex will save $600 million, and lower interest expense will save another $600 million this year, offsetting the $7.8 billion year-over-year decline in Industrial EBITDA.

In addition, Obin said investors seem to be underestimating the positive near-term working capital impact that the grounding of the Boeing Co BA 737 MAX will have on GE.

“This was a $1.4bn outflow in 2019, but we estimate a $0.5bn benefit in 2020E, or a +$1.9bn y/y positive swing,” Obin wrote in a note.

Benzinga’s Take: It seems GE’s financial situation is far better than it has been in recent years, and the company’s balance sheet is stable and flexible enough to endure yet another difficult year. However, GE investors are likely growing tired of hearing about how a turnaround is just around the corner after years of underperformance and lackluster FCF and earnings numbers.

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