GE Stock Could Rise More Than 20%, Says Analyst -- Barrons.com
11:24 am ET October 9, 2018 (Dow Jones) Print
GE Stock Could Rise More Than 20%, Says Analyst -- Barrons.com
By Teresa Rivas
A new chief executive has given analysts hope about General Electric's (GE) prospects, including William Blair.
Where we were: GE named former Danaher (DHR) CEO Larry Culp to the top job, a move that brought plenty of accolades.
Where we're headed: New leadership and a goodwill write-down are positive steps in GE's turnaround, one that could change how investors value the stock.
GE's new CEO has plenty of investors excited and hopeful about a turnaround after years of mismanagement and underperformance.
William Blair's Nicholas Heymann sees a brighter future for the beleaguered industrial giant. He reiterated an Outperform rating, writing that his sum-of-the-parts analysis puts GE's value between $15 and $17 a share -- or higher.
GE's turnaround consists of three phases, which it's largely already plodded through: restoring liquidity (via $20 billion in planned asset sales), reducing risk (via debt reduction, litigation resolution, and improving pension funding), and returning to growth (on track for 2019 and beyond). Heymann argues that Culp's leadership -- along with the write-down of $23 billion of goodwill at GE Power -- is "likely to be the final of three chapters in GE's transformation announcements," following the company's dividend cut and portfolio "reshaping."
He writes that Culp's "exceptional reputation," along with a contract that motivates him to improve GE's stock performance, will help shift investors' focus and lead them to value GE on a sum-of-the-parts (SOTP) basis, rather than on near-term adjusted earnings per share, free-cash-flow generation, and/or dividend yield and sustainability, as has been the case recently.
Heymann's SOTP analysis assumes no value for GE Power, but still puts the stock between 7% and 23% above recent levels, from $14.60 to $16.78 a share. "While GE may write down potentially all of the $23 billion in goodwill at the Power business, this would suggest Power's estimated book value at year-end 2017 was approximately $48 billion, or approximately $5.52 a share," he writes.
Assuming GE were worth $48 billion in book value, that could put GE's SOTP valuation around $20.10 to $22.30 a share. In addition, if GE were to sell a large minority stake in GE Digital for $10 billion, Heymann writes, that would get the stock to $21.25 to $23.45, while "assigning no value to GE's second half 2018 or 2019 adjusted EPS or free cash flow."
GE is up 0.6% to $13.70 in morning trading. The Industrial Select Sector SPDR ETF (XLI) is down 0.7% to $78.59.
Make the Connection
Culp appears to have his work cut out for him.
Have we finally reached that elusive bottom for GE stock?
Write to Teresa Rivas at teresa.rivas@barrons.com
(END) Dow Jones Newswires
October 09, 2018 10:52 ET (14:52
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