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>>> GE Stock A Buy? General Electric Reaffirms 2022 Financial Outlook Ahead Of 3-Way Split


Investor's Business Daily

by APARNA NARAYANAN

04/06/2022


https://www.investors.com/research/ge-stock-buy-or-sell/?src=A00220


General Electric (GE) is seeing end markets and cash flow improve as it transforms into an aviation pure play. But supply disruptions and rising inflation pose risks to aviation's recovery from the coronavirus pandemic. Is GE stock a buy right now?

On March 10, General Electric reaffirmed 2022 financial guidance along with longer-term profit and cash generation targets. GE also discussed its planned split into three separate, publicly traded companies.

On Jan. 25, GE delivered mixed earnings for its most recent quarter. Its key jet-engine aviation business continues to recover while managing impact from the Covid-19 omicron variant, CEO Larry Culp said.

GE Stock Technical Analysis

Shares failed a brief Nov. 9 breakout past 115.30 and there's no new buy point so far. GE stock remains below a falling 10-week moving average, which has undercut its longer-term, 40-week counterpart. Those are both technical negatives.

Shares broke out in November on news of GE's three-way split, but have tumbled since.

The relative strength line for GE stock has fallen sharply since last March, according to MarketSmith charts. It rallied for parts of 2020 and 2021 on hopes for GE's turnaround. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.

The industrial giant earns a dull IBD Composite Rating of 50 out of 99. The rating combines key technical and fundamental metrics in a single score.

General Electric owns an RS Rating of 35, meaning it has outperformed 35% of all stocks over the past year. The Accumulation/Distribution Rating is a D-, on a scale of A+ to a worst E. It's a sign of considerable selling of GE shares by big institutions over the past 13 weeks.

GE remains a popular stock with strong institutional support. As of December, 1,832 funds owned shares. GE stock shows zero quarters of rising fund ownership, according to the IBD Stock Checkup tool.

GE Earnings And Fundamental Analysis

On key earnings and sales metrics, GE stock earns an EPS Rating of 57 out of a best-possible 99, and an SMR Rating of D, on a scale of A+ (best) to E (worst). The EPS Rating compares a company's earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.

In recent years, GE shed a biotech unit, its light bulb business, and a majority stake in its oil field services business. It's merging its aircraft-leasing unit with AerCap (AER). Eventually, it's expected to exit jet leasing altogether.

On Jan. 25, GE posted earnings of 92 cents a share for the December quarter, beating views. Amid supply-chain issues, revenue fell 7% and missed. During the quarter, GE's aviation business grew sales 4% vs. a year earlier, while health care was down 4%, renewable energy was down 5% and power was down 10%. And the company recorded industrial free cash flow (FCF) of $3.7 billion for the quarter, and $5.8 billion for the full year.

But GE gave a weaker-than-expected 2022 EPS outlook, citing inflationary costs. It expects revenue and FCF to further improve.

The FCF measure is closely watched as a sign of the health of GE's operations and its ability to pay down debts. In 2020, GE generated $606 million in FCF, down 66%, but beating its own guidance. In fact, General Electric turned cash-positive a year ahead of schedule.

For 2022, analysts forecast GE earnings to vault 99% as sales rebound 4%. But General Electric is likely to surpass 2019 EPS of $5.20 only next year, FactSet says. In 2023, GE earnings are likely to rise a further 64% as sales grow 9%.

Out of 22 analysts on Wall Street, 15 rate GE stock a buy and seven have a hold, while no one has a sell, according to FactSet.

Big GE Split Caps Long Restructuring

In 2024, GE will emerge as an aviation-focused company after a three-way breakup. The American industrial icon plans to spin off its lower-growth health and energy businesses to focus on aviation.

The three-way GE split caps years of dwindling profits and a costly restructuring. It closes a key chapter in General Electric's 129-year-old history, with roots going back to Thomas Edison.

"Our contrarian bull case is that GE is not in 'deal purgatory,'" RBC Capital Markets analyst Deane Draywrote in a March 6 note. In fact, he thinks a faster separation timeline and additional divestitures could give shares a boost. The analyst has an outperform rating and 113 price target on GE stock.

Headwinds For GE Aviation

Aviation — GE's "crown jewel" — makes jet engines for plane makers including Boeing (BA) and Airbus (EADSY). GE Aviation also runs a lucrative aftermarket business for engine repair and maintenance.

In 2020, Boeing halted production of the 737 Max jet for a few months after two fatal flights, which weighed on Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. Engine shop visits slowed while leasing customers sought short-term deferrals. As a result, GE Aviation slashed jobs by 25% and later warned of more cuts.

Many of those headwinds have lifted. Meanwhile, the market continues to shift from wide-bodies to longer-range, narrow-body aircraft, benefiting General Electric. A GE joint venture dominates the market for narrow-body jet engines.

GE sees the aviation recovery continuing in 2022. But it's monitoring newer Covid-19 variants.

During the pandemic, travel restrictions to halt the spread of Covid-19 negatively affected aircraft deliveries and orders.

Also amid the pandemic, some commercial aerospace suppliers struggled to deliver parts and equipment on time, due to shortages of semiconductor chips and plastics. Costs of aluminum and steel also rose. Those woes could persist in 2022, according to Fitch Ratings.

Growing Momentum For GE Stock

CEO Culp's top priority is improving General Electric's financial position, while strengthening GE's industrial core, as a maker of jet engines, gas turbines, wind turbines and hospital equipment.

In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.

But GE now touts recovery or stabilization in key business segments, including aviation and gas power.

Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.

As GE's financial condition improves, hopes for the dividend could follow. In December 2018, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, announced in November 2017 along with a broad restructuring, had halved the dividend to 12 cents.

The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends. After a reverse stock split in August, GE stock now offers a 32-cent annual payout, yielding 0.4%.

Rivals To General Electric

Rivals to General Electric include Raytheon Technologies (RTX) and Siemens Energy.

Raytheon and Rolls-Royce of Britain are major jet-engine rivals. Siemens Energy competes with GE in power. It emerged in September after Siemens (SIEGY) spun off its low-margin gas turbine business. Japan's Mitsubishi Hitachi is another big power rival.

The diversified operations group ranks No. 31 out of 197 industry groups tracked by IBD. It includes 3M (MMM), Honeywell (HON) and Roper Technologies (ROP).

Is GE Stock A Buy Now?

General Electric continues to make progress in its long, ambitious turnaround. GE earnings, sales and cash flow are expected to further improve in 2022, as the airline industry and broader economy slowly recover from the pandemic.

Moreover, General Electric's poised for a huge transformation, breaking from its diversified past to focus on aviation. New Covid-19 variants could threaten the commercial aviation recovery.

Many analysts on Wall Street are bullish about GE's current leadership and improving fundamentals. But others remain on the sidelines. And GE belongs to an industry group that is acting relatively well.

From a technical perspective, GE stock sits below key support levels after a failed breakout attempt. It has no current buy point and the RS line shows significant lag.

Bottom line: GE stock is not a buy.

Over the long term, buying an index fund, such as SPDR S&P 500 (SPY), would have delivered safer, higher returns than GE stock. If you want to invest in a large-cap stock, IBD offers several strong ideas here.

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