The UBS analyst cites GE's successful de-levering, "strong" estimated earnings growth in 2020 and 2021 and a tripling of free cash flow to $2.3B next year
Shares of General Electric (GE) jumped on Thursday morning after a new analyst at UBS assumed coverage of the stock, giving it a Buy rating. The analyst said shares are at a "positive inflection point" into 2020, given the company's successful de-levering.
GE AT 'POSITIVE INFLECTION POINT' IN 2020: On Wednesday afternoon, UBS analyst Mark Mittermaier assumed coverage of General Electric with a Buy rating and a price target of $14. This is an upgrade in the firm's rating, as prior analyst Damian Karas previously had a Neutral rating and $11.50 price target on the shares. "We believe the stock is at a positive inflection point into 2020," Mittermaier told investors in a research note, citing GE's successful de-levering, "strong" estimated earnings growth of 12% and 29%, respectively, in 2020 and 2021 and a tripling of free cash flow to $2.3B next year led by the company's aviation and healthcare units. As a result, the analyst expects the stock's narrative to change from "significant cash drag to successful transformation."
Looking at the wide spread in consensus for even key financial items, Mittermaier said he "questions the depth of which consensus captures the ongoing GE evolution." The analyst added that analyzing GE "is not trivial and requires a detailed segment level analysis. This is what we have done. Our view is based on a multitude of proprietary data."
LOOKING AHEAD: Looking ahead, Mittermaier said he continues to see strength in Aviation with a 6% organic growth CAGR over the next six years and margins expanding to about 25% in 2025 from about 20% in 2019. The analyst also said he expects GE to reach its leverage targets of ~2x Ind. Net Debt/EBITDA & ~4x D/E for GE Capital, creating the foundation for an increased focus on the operating businesses where he sees substantial value that is currently not priced in. He also thinks Power, a major trouble spot for the company, will be "better than many think." He expects the Power portfolio to remain a multiyear turnaround, and expects Gas Power to be a cash contributor going forward to the tune of about $13B in 2035.
Mittermaier said he believes the growth story and incremental cash generation over the next five years remains underappreciated. He wrote that the stock has performed strongly on the back of 2019 free cash flow guidance upgrades and expect this "relief rally" to continue as the narrative on the stock shifts from survival to transformation.
WHAT'S NOTABLE: While Mittermaier is bullish on GE, some, like JPMorgan analyst Stephen Tusa, are bears Last week, the analyst said he came away from General Electric's Healthcare investor day with no change to his negative view. Tusa said that while healthcare is an "ok" asset that has some opportunity to be managed better, he was "underwhelmed by a presentation that was not differentiated" versus any of the other Healthcare investor events of the past. The analyst believes this, along with a guide lower for Q4, taking 2019 estimates to the low end of the range, supports his Street-low estimates for GE. Tusa previously said GE is missing guidance on core business EBIT that was set in March, "the latest of anyone in the sector," with the 10% shortfall the most of any of the large caps.
PRICE ACTION: In morning trading, shares of GE are up 4% to $11.40.