While Morgan Stanley sees limited risk from 737 MAX grounding, JPMorgan says the issue is widely misunderstood
General Electric (GE) is scheduled to report results of its fourth fiscal quarter before the market opens on Wednesday, January 29, with a webcast scheduled for 8:00 am ET. What to watch for:
1. OUTLOOK: When the company reported third quarter earnings back in October, General Electric also backed its fiscal year 2019 adjusted earnings per share view of 55c-65c, and its 2019 outlook for Industrial segment organic revenues growth in a mid-single-digit percentage range. Additionally, the company said it sees industrial free cash flows of $0B-$2B versus a previous outlook of ($1B)-$1B, fiscal year 2019 adjusted GE Industrial margin expansion flat to up 100bps, and restructuring expense of $1.1B-$1.4B versus a prior outlook of $1.7B-$2B. Meanwhile, during the GE Healthcare Investor Day in December, the company said it sees fiscal year 2019 Healthcare revenue of $19.8B-$20B. Excluding Biopharma, GE sees fiscal year 2019 Healthcare revenue between $16.5B-$16.7B. General Electric added that it is "on track" to close its Biopharma sale in the first quarter of 2020.
2. 737 MAX RISK: Last week, Morgan Stanley analyst Joshua Pokrzywinski upgraded General Electric to Overweight from Equal Weight and raised his price target on the shares to $14 from $11, telling investors that he sees its Aviation unit as a "best-in-class franchise" and that he believes the risk from the continued grounding of the Boeing (BA) 737 MAX appears limited. Further, risks from Power, pension, and Long-Term Care are declining, Pokrzywinski added. In total, he sees upside for GE's free cash flow in 2021 given his conviction in the Aviation franchise as the MAX disruption subsides and his view that the cash trajectory for the Power unit is improving.
Meanwhile, Bank of America analyst Andrew Obin told investors that there is increasing likelihood that the Boeing 737 MAX production pause will extend through the first half of 2020, which presents a risk to General Electric, Honeywell (HON), Parker-Hannifin (PH), Eaton (ETN), and Rexnord (RXN) as all have exposure to the MAX program. While he believes investors may look through 737 MAX issues in the first half, he also thinks investors may underestimate the impact on secondary and tertiary suppliers and broader U.S. industrial firms.
On January 24, JPMorgan analyst Stephen Tusa said that while the prevailing sell-side narrative as General Electric's guidance approaches is that the 737 Max production cut is negative, the "simple math" suggests it should have a positive influence, both in 2019 and in 2020, up to $600M in segment profit versus the guidance issued in last March. In a research note titled "MAX Math: Should Be A Positive Near Term, Negative Long Term, Opposite Of Prevailing Narrative," he said the key is the difference between engine production, engine deliveries to Boeing, and Boeing deliveries to customers, "with several moving parts suggesting near term upside." However, this performance is unsustainable and timing related, the "opposite of the narrative of near-term pressure with longer-term upside," he adds. Tusa believes the "growing narrative" that Max is a negative today, and anything reported will be "better than feared" with future upside, "is not supported by the math." There is more to the GE story that will need to be watched into and out of earnings, with many of these items positive but timing-related near term, and unsustainable longer term, contends the analyst, who keeps an Underweight rating on shares of GE.
3. PARTNERSHIPS: Endra Life Sciences (NDRA) announced earlier this month that it has renewed its collaboration agreement with the GE Healthcare unit of General Electric, extending the agreement's term to January 2021. Under the terms of the agreement, GE Healthcare will continue to support Endra's commercialization activities for its TAEUS technology for use in a fatty liver application by, among other things, facilitating introductions to GE Healthcare clinical ultrasound customers. In return for this assistance, Endra will afford GE Healthcare certain rights of first offer with respect to manufacturing and licensing rights for the target application.
General Electric Aviation has also teamed up with BBAM Aircraft Leasing & Management to provide the AirVault asset transfer system across a fleet of 510 aircraft including Airbus (EADSY), Boeing and Embraer (ERJ) airplanes used by more than 90 airlines.