By Tomi Kilgore, MarketWatch
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.
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.
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
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.”