General Electric: What You Need to Know Ahead of Earnings, According to J.P. Morgan

Over the last 12 months, shares of General Electric (GE) have picked up steam. The industrial giant has carried the momentum into 2021 and the stock has accumulated 25% of share gains year-to-date. Investors will be keen to find out if the company can sustain the forward charge when it reports Q1 earnings today before the bell.

In tandem with the share appreciation, the company has been restructuring its business and while J.P. Morgan’s Stephen Tusa “applauds” the move to a single balance sheet and “new definition for Industrial FCF,” the analyst thinks that ultimately the “headline results will require quite a deep dive.” As a result, the analyst says the “increasingly adjusted metrics” are not so relevant after all.

Tusa notes that a mix of one-time MAX benefits, the timing of Aviation discount cash payments, advances on “an unseasonally strong amount of loss-making wind orders (4+ GWs V 2.3 GWs in 1Q20 and a 12 GW total in 2020) and carry-over from the big episodic Taiwan deal,” all imply an improved year-over-year display which should get the company to “breakeven FCF.”

Starting in Q2, however, the analyst believes the bulk of the positives will “fade entirely.”

Naturally, Tusa highlights the importance of the earnings power in the quarter, which the analyst sees as “close to zero.” In fact, the analyst has EPS hitting 0.00 – consensus has $0.01. Tusa also says this estimate does not include the “cash negative GECS remainco,” i.e., what’s left with the company as a result of the sale of the aircraft- leasing business (GECAS) to AerCap which Tusa says has not yet been “fully” factored in by Wall Street, either.

“Ultimately,” the 5-star analyst summed up, “The positive FCF headline keeps us from being too negative but the details will continue to tell the story of weak underlying FCF where advances/working capital are unsustainable benefits for businesses that we believe at their core are too low margin and too low quality to command this type of premium.”

Accordingly, Tusa reiterated a Neutral (i.e., Hold) rating for GE stock, backed by a $5 price target. The implication for investors? Downside of a value shredding 63% from current levels. (To watch Tusa’s track record, click here)

Looking at the consensus breakdown, the Street has a more positive slant. Based on 8 Buys vs. 5 Holds, the stock has a Moderate Buy consensus rating. The $13.67 average price target implies the shares will stay rangebound for the foreseeable future. (See General Electric stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.