Stock in General Electric is on fire for a lot of good reasons. That’s great news for bullish investors. But with higher prices come higher expectations, which means the company’s annual outlook meeting Wednesday will be a big deal.
General Electric (ticker: GE) shares are up more than 30% year to date, far better than comparable gains of the S&P 500. Investors are feeling better about GE’s aviation business because of Covid-19 vaccines. The global economy is improving, too.
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Even higher interest rates are helping GE stock these days. GE has a large employee pension obligation, and higher rates means it can earn more money on pension assets. More earnings from the money already set aside to pay benefits means less cash will need to be added in the future.
Those topics, and more, will be discussed at the meeting. Here’s what to watch for when management talks about the year ahead:
When GE hosted its last outlook meeting a little more than a year ago, management expected to earn about 55 cents a share in 2020. That was before Covid-19.
But the pandemic’s impact was difficult to predict. GE’s early estimate was that Covid might hurt cash flow by a few hundred million dollars. It turned out far worse than anyone imagined.
Covid-19 ended up decimating demand for commercial air travel. GE’s largest business is tied to jet engine manufacturing so the pandemic hit the company harder than most. GE eked out a 1 cent per-share profit. More important, GE managed to generate positive free cash flow of about $600 million for the full year.
In 2021, GE believes it can generate about 20 cents in per-share earnings and about $3.5 billion in free cash flow from its industrial businesses. That guidance was given when the company reported fourth-quarter results.
On Wednesday, analysts will check out just how conservative that guidance is. A key question that they’ll want answered: How much improvement in commercial air travel is driving GE’s numbers? Things are getting better, but slowly. Flights are still off about 50% from this time last year, but they were down 65% only a couple of months ago.
In 2020, GE’s balance sheet and the pending sale of its healthcare business, Biopharma, to Danaher (DHR) was significant. This year, analysts will ask management about another deal—one that would combine GE’s jet-leasing business with AerCap (AER). That agreement could dramatically shrink the size of GE Capital and provide the company with another source of cash. So far, GE has declined to comment on deal status or structure.
The healthcare deal helped GE reduce debt. An AerCap deal would simplify the company’s balance sheet more. That’s important for both investors and analysts. “The subtext of the event will be that the GE story is simplifying as balance sheet and contingent liability risks diminish,” wrote Wolfe Research analyst Nigel Coe in a report previewing GE’s outlook event. GE Capital still has some issues, such as poorly performing long term-care insurance contracts. Coe wants to see GE Capital fund the problems instead of taking cash flow from the industrial businesses.
Coe rates shares Buy and has a $14 price target. RBC analyst Deane Dray also rates shares Buy. His price target is $13 a share. He expects more granular guidance by business segment as well as cash flow generation throughout the year.
GE generates most of its cash flow in the second half of the year. The company sells a lot of expensive equipment. Businesses like to take delivery late in the year. That way they preserve cash as long as possible and still earn a tax deduction. “For tax purposes….all equipment placed in service during the taxable year is treated as placed in service at the midpoint of the year,” accounting expert Robert Willens tells Barron’s.
In one key segment, GE’s renewable energy business, Barclays analyst Julian Mitchell is looking for management to lay out the path to consistent profitability. “The three main pieces inside Renewables have very different operating margin rates,” explains Mitchell. Onshore wind is higher margin in North America than overseas. One challenge for GE is to improve international profit margins. Offshore wind is lower margin, but higher growth. Mitchell wants to hear about new orders. Mitchell, like Dray and Coe, rates GE shares Buy. His target is $13 a share.
Overall, the Street like GE stock. About 65% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 60%. With GE stock on the move, shares have raced past analyst price targets. The average analyst price target is about $13.
Options markets imply GE stock will move about 5% to 7% after the event. That makes the outlook call like an earnings report. GE stock has moved about 6%, up or down, on average the past six times the company reported earnings.
The event begins at 8 a.m. EST and is expected to run a couple of hours.
Write to Al Root at [email protected]
