General Electric supplies engines for many U.S. military aircraft.
Loic Venance/AFP via Getty Images
J.P. Morgan analyst Stephen Tusa says General Electric’s defense business is missing its targets. It is the latest problem he sees for GE stock.
The shares, however, haven’t reacted much. General Electric (ticker: GE) stock was down about 0.4% at $14.10 in early trading, while the S&P 500 and Dow Jones Industrial Average were both up about 0.2%. Investors don’t appear to be surprised by a bearish take from the analyst.
Tusa’s target for the stock price is the lowest on Wall Street, at $5.
GE’s defense business is part of its aviation unit. The company makes engines for the planes and helicopters the Department of Defense uses. It says company products are on 56% of “everything that the DoD flies.”
In 2019, before Covid-19, sales from GE’s military business amounted to about $4.4 billion, or about 13% of GE’s aviation business and 5% of GE’s total industrial business. In June 2019, GE expected defense sales to grow by double-digit percentages in 2020 and to hit about $8.3 billion by 2025.
Military sales in 2020, however, didn’t grow that quickly, coming in at about $4.6 billion this past year. GE management cited “supply chain challenges, slowing shipment” on the company’s fourth-quarter earnings conference call.
The 2020 sales shortfall is part of Tusa’s concern. “GE’s Defense business continues to be one of the few in the Sector that we can find that is consistently missing targets,” wrote Tusa in a Wednesday report.
He has a point. Defense prime contractors such as Lockheed Martin (LMT) and Northrop Grumman (NOC) turned in higher 2020 sales than expected. Those, however, are huge military franchises, multiples the size of GE’s defense business.
“We continue to view GE’s long-term projections stubbornly aggressive in light of trends in key programs,” Tusa said. He called the F-18 Super Hornet. made by Boeing (BA) and outfitted with GE engines, a declining program.
Boeing, however, is still making the plane and has more authorized by the Navy for years to come. Another big program, producing helicopter engines for the Army, has potential to grow. And in any case, it is difficult to extrapolate any one program into long-term trends for an entire military business. GE also sells a lot of spare parts for existing fleets.
Overall, CFO Carolina Dybeck Happe said at a May 27 investor conference, the company expects “high single-digit revenue growth” in the military business in 2021. Those comments may be what prompted Tusa to take a look at that part of GE’s operations.
The military business, however, isn’t a make-or-break issue for GE stock. Commercial aviation is.
Investors want to see air travel, which is critical to demand for jets and jet engines, get back to pre-pandemic levels. In the U.S., air travel is still about 30% below 2019 levels, but it is improving month over month. More people got on planes in the U.S. on Monday than on any day since March 2020, before Covid-19 decimated the industry.
This isn’t the first negative take from Tusa on a GE business. He has written recently about his concerns regarding commercial aviation, cash flow, and gas- powered electricity generation. He rates the stock at Hold.
Overall, about 57% of analysts covering GE stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P is about 55%. The average analyst price target is about $14.25 a share, close to where GE stock has traded recently. Without the highest and lowest target price, the average call among analysts moves to about $14.75.
Tusa’s $5 target weighs on the average a little more than the lowest price targets for other stocks. Removing the high and low target prices for Honeywell International (HON) shares, for instance, raises the average target price less than 1%.
Despite Tusa’s bearish views, GE stock has had a good year. Shares are up 30% year to date, better than comparable gains of the broader market.
Write to Al Root at [email protected]
