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Jan. 24, 2020, 7:13 a.m. EST

GE’s stock jumps after Morgan Stanley gets bullish ahead of earnings

‘Best-in-class’ aviation business, lower LTC risks and improving power and cash flow outlook suggests it’s time to buy

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By Tomi Kilgore, MarketWatch


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Shares of General Electric Co. powered higher Thursday after Morgan Stanley analyst Joshua Pokrzywinski turned bullish and raised his price target by nearly 30%, citing a “budding turnaround” in fundamentals and reduced risk regarding long-term liabilities.

Pokrzywinski’s upgrade comes less than a week before GE’s /zigman2/quotes/208495069/composite GE -3.18% earnings, and helped to boost shares of the industrial conglomerate 3.6% in afternoon trading, which puts it on track to snap a six-session losing streak.

The Morgan Stanley analyst raised his rating to overweight from equal weight, and boosted his price target to $14 from $11. His new target implies a 19% gain from current levels.

“The story has shifted from one of financial distress to a budding turnaround,” Pokrzywinski wrote in a note to clients.

The upgrade comes ahead of GE’s fourth-quarter report, which is scheduled to be released before the market opens on Jan. 29. GE has beaten earnings-per-share expectations in the past three quarters.

/zigman2/quotes/208495069/composite GE 11.86, -0.39, -3.18%

Pokrzywinski said while the extended grounding of Boeing Co.’s /zigman2/quotes/208579720/composite BA -3.78%  737 MAX planes “tempers” the free cash flow (FCF) outlook for this year, as GE makes the MAX’s engines, FCF should accelerate in 2021, with an expected $1 billion in FCF from GE’s “best-in-class” aviation business.

Don’t miss : Boeing says it doesn’t expect 737 MAX return until mid-2020.

And regarding risks associated with long-term care, Pokrzywinski believes there is less risk of further surprises in terms of charges in GE’s long-term care (LTC) business and its pension, as the low interest rate environment, which was the key driver of previous charges, hasn’t gotten any worse, and given the pension plan freeze announced in October.

See also : GE freezing pensions for 20,000 employees.

“We believe the first step in getting comfortable with GE is that the bear cases on pension and LTC...are less likely,” he wrote

Also read : GE says shock multibillion-dollar insurance charge is a ‘special case.’

Pokrzywinski said FCF from GE’s long-troubled power business is also set to improve, as orders stabilize, profit begins improving and the drags on cash from excess capital expenditures, high restructuring costs and delivery on “poor quality” backlog are eliminated.

“We’re wary of putting too much emphasis on the story, as improving sentiment likely exceeds upside to cash flow in 2020,” Pokrzywinski wrote. “However, we came away from last quarter believing that management was ‘trimming the tails’ on risk, particularly with pension and long-term care.”

GE’s stock soared 11.5% on Oct. 30, after the company reported a third-quarter profit that beat expectations and provided an ‘optimistic’ cash flow outlook. It has rocketed 25% since the results were reported through Wednesday. In comparison the SPDR Industrial Select Sector exchange-traded fund /zigman2/quotes/202026558/composite XLI -2.85%  has gained 5.0% and the S&P 500 index /zigman2/quotes/210599714/realtime SPX -3.35%  has climbed 9.4% over the same time.

“We view aviation as a best-in-class franchise and the 737 MAX disruption as temporary. At the same time, tail risks from power, pension and long-term care are declining,” Pokrzywinski wrote. “2021 brings significant cash flow and strong improvement in risk/reward.”

/zigman2/quotes/208495069/composite
US : U.S.: NYSE
$ 11.86
-0.39 -3.18%
Volume: 70.98M
Feb. 24, 2020 6:30p
P/E Ratio
627.51
Dividend Yield
0.34%
Market Cap
$103.58 billion
Rev. per Employee
$429,735
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/zigman2/quotes/208579720/composite
US : U.S.: NYSE
$ 317.90
-12.48 -3.78%
Volume: 6.07M
Feb. 24, 2020 6:30p
P/E Ratio
N/A
Dividend Yield
2.59%
Market Cap
$179.03 billion
Rev. per Employee
$660,961
loading...
/zigman2/quotes/202026558/composite
US : U.S.: NYSE Arca
$ 81.21
-2.38 -2.85%
Volume: 18.01M
Feb. 24, 2020 8:00p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,225.89
-111.86 -3.35%
Volume: 2.75B
Feb. 24, 2020 5:04p
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Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

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