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General Electric hasn’t had a quarterly earnings report like this in a long time. GE stock has been soaring and that raises the likelihood of a big post-earnings move—up or down. And right now the odds might be favoring down.
General Electric (ticker: GE) stock is up about 46% over the past three months, propelled by a couple of factors. First, the company reported solid third-quarter earnings back in October. Analysts expected a loss but GE managed to report a surprise profit.
Vaccines did their part, too. GE is a large aerospace supplier and Covid-19 has decimated demand for commercial air travel. The prospect of rising travel demand as the world builds immunity to Covid-19 has helped all aerospace stocks, not just GE. Shares of Boeing (BA) and Airbus (AIR.France), for instance, are up 23% and 31% over the past three months, respectively.
For GE, the 46% gains is the largest three-month gain heading into an earnings report since January 2010. And the good news is that earnings are usually better when GE stock has been rising, not falling, into the report: When GE stock is weak going into earnings the company misses analyst estimates about 50% of the time.
Half might not seem all that bad, but companies usually beat Wall Street earnings estimates. Almost 85% of S&P 500 company reported better than expected earnings in the third quarter of 2020. GE has exceeded Wall Street estimates in about 73% of the quarters over the past 11 years.
A solid earnings report on Jan. 26 looks like it is coming, and Wall Street seems to agree. Analysts expect 9 cents in adjusted per-share earnings from $21.8 billion in sales, up from about 2 cents a share three months ago. GE reported a profit of 21 cents a share during the fourth quarter of 2019.
The problem for investors is that an earnings beat after a strong stock price run doesn’t always mean a higher stock price in the following three months. GE shares are just as likely to drop as they are to rise in the three months after a strong or weak stock price run into a quarterly earnings report. What’s more, when the stock drops after earnings the drops are steeper following large run-ups before the earnings release.
But earnings might not matter as much this quarter. UBS analyst Markus Mittermaier, for one, isn’t worried about a big post-earnings drop, even on an earnings miss. He only expects 6 cents in per-share earnings, but still calls GE a top pick in 2021 because of improving free cash flow this coming year and beyond. That would make earnings and a 2021 outlook presentation in March positive catalysts for the stock, he writes. Mittermaier has a Buy rating and a $14 price target on GE shares.
Being bullish with below Street consensus estimates is the situation Andrew Obin finds himself in too. He, like Mittermaier, rates shares a Buy, while his price target is $13 a share. Obin’s fourth-quarter earnings estimate is 7 cents a share. But like Mittermaier, he’s watching free cash flow, not earnings. Obin expects management to guide to $1.5 to $3.5 billion in 2021 free cash flow from GE’s industrial operations, while guidance of $1 billion to $2 billion would be a disappointment.
J.P. Morgan analyst, and GE bear, Stephen Tusa isn’t bullish about earnings or free cash flow. He is modeling a loss of 3 cents a share for the fourth quarter. What’s more, he believes that the rest of Wall Street is too optimistic about the pace of free cash flow improvement. He rates GE shares Hold. Tusa doesn’t have a price target, but the most recent one he had was just $5 a share.
Either way, GE will likely have to smash free cash flow expectations for the fourth quarter and give better than expected guidance to keep the stock moving higher.
Write to Al Root at [email protected]
