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Fresh opinions on General Electric Company (NYSE:GE) are like the weather in [insert your state here]… if you don’t like it, just wait five minutes, because it will be changing soon.
Indeed, GE stock has been a particularly hot battleground of late, with analysts now starting to respond to each other’s calls rather than coming to independent conclusions.
“Not a week goes by (especially during II voting season) without some sell sider making some sensationalist argument about the largest and most controversial multi-industrial stock, GE (both bull and bear). We too are human and certainly not immune to the temptation, but in this note we attempt once again to briefly address one of the key legitimate debates in a balanced manner: cash generation.”
The ever-changing rhetoric makes it tough to get a bead on GE stock.
After years of lackluster results though, it feels as if the bulls’ arguments are starting to hold a little more water.
GE Stock: Years of Disappointment
The last couple of years have been disappointing ones for General Electric stock. Last year’s $123 billion in revenue isn’t considerably better than 2014’s top line of $117 billion. Net income of $8.1 billion for last year is miles away from 2014’s profit tally of $15.2 billion.
The recent past has been similarly disappointing years for GE shareholders. General Electric stock is down 4% since the end of 2016, while the Dow Jones Industrial Average has managed to gain 18.5% for the timeframe.
What gives? The simple version of a complicated answer is, GE stock just doesn’t have that Jack Welch magic anymore. Forbes contributor Adam Hartung may have summed it up best by recently opining “GE Needs A New Strategy And A New CEO.” He pointed out something alarming that underscores his point. That is, GE stock is now down 38% since he took the helm, and the most notable thing he has done is dismantle the company Jack Welch largely assembled.
As the old saying goes though, it’s darkest before dawn.
General Electric Stock Can’t Get Any Worse
It’s interesting. Broadly speaking, even the analyst community knew — and joked about — the way they were mercilessly railing on GE as its floundering worsened. The tone of that rhetoric, however, has started to change for the better.
One of those changes was supplied by the aforementioned Steven Winoker. He added to that comment when he reiterated his outperformance rating on General Electric:
“We see GE in its current configuration as an 85-90% through the cycle cash converter (sometimes higher/lower). It would appear that the bear case for industrial FCF in 2018 is around $1.10 (although the exact definition probably varies).
For context, 2016 Ind. FCF/share came in at $0.98 ex-deal taxes and pension contribution and $0.79 all-in. We see management under even more pressure than usual to execute and we model $1.24 and $0.76 respectively for 2017, and then $1.55 and $1.35 respectively for 2018. In this note, we walk through an explanation of cash generation last year and then the major drivers of improvement in 2017 and 2018. We see the largest sources of cash flow growth coming from segment profit growth (e.g., cost out) and working capital efficiency in a more concentrated industrial portfolio (that historical performance comps would miss)”
In other words, he sees better days ahead for General Electric stock … finally.
Winoker’s optimism regarding better execution wouldn’t be so remarkable if William Blair analyst Nicholas Heymann hadn’t offered up some similar comments about improved operations being a have-to reality this year and next:
“Exceptional operational execution will remain critical across all GE’s operations throughout 2017 to achieve its 100-basis-point improvement in operating margins, its continued improvement in cash flow from operations, and a significant increase in the pace of its organic sales growth.”
Heymann further compared GE stock to a coiled spring, brought on by a strong degree of investor pessimism.
Even the biggest professional naysayers are starting to see just how brutal they’ve been to General Electric, and how ready the company is to turn things around. Barclays analyst Scott Davis recently noted “no rational bull is arguing that GE isn’t broken to some extent,” yet want on to say at the same time:
“… these issues are well known and appear more than fully priced in. The bull case is unpopular and is creating tension in even my longest client relationships. As I said in an earlier piece, life’s too short. I should just downgrade this thing and join the angry mob. That’s certainly what I would have done earlier in my career. If you can’t beat ’em, join ’em. It’s an easy company to beat up on.”
Still, Davis agrees with Heymann in the sense that General Electric stock has been one of the market’s favorite punching bags, but also agrees with Winoker that GE can only get better from here (and should).
Bottom Line for GE Stock
Reading between the lines? No, that’s not quite what this is. This is more of a seeing the forest rather than the individual trees. The market pretty much universally doubts GE stock here, and has arguably more than priced in those worries.
Even analysts are starting to take note of the excessive doubts, viewing General Electric as a ripe contrarian trade … especially now that its top management senses they’re fighting for their jobs. Now may be the time to start trickling into a longer-term position, while you can get in without fighting the crowd.
– James Brumley