General Electric: when the reversal accelerates, time to bet on the shares?

More than ever in the last two years, investors who have looked closely to see how the turnaround of industrial giant General Electric (NYSE 🙂 finally take shape are finally given a number of reasons to feel confident.

Free cash flow, the main measurement on CEO Larry Culp's report, is now improving some of the company's industrial units are beginning to show signs of stabilization after a steep decline since 2017.

Encouraged by this power, investors have begun to build up their positions in GE shares, which increased by 50% in 2019. Trade yesterday at $ 13.16 after gaining 2.4% during the day, the shares have risen more than 15% this year.

But this rally should not give an overly positive impression of the current situation of the troubled industrial giant. The recovery of the shares has by no means been sufficient to compensate for the losses suffered by investors after the collapse of GE since 2017, wiping out more than $ 200 billion in shareholder value and forcing the company to drastically reduce its dividend.

Given this painful past, it is important to find out whether this turn will be sustained or whether it is just a dead cat's tail.

GE bulls point to various developments that they believe make the recovery more credible – including the company's fourth quarter last month, when the expected free cash flow would at least roughly match the performance of 2019 and possibly increase to $ 4 billion.

That was after GE reported that it generated $ 2.3 billion from its industrial companies in the course of 2019, exceeding the advanced range of GE & # 39; s range.

Power Unit continues to struggle

This achievement is something that Culp has been promising since he took over at the end of 2018, charged with the task of saving the GE ship from sinking, as demand for its major products dropped and debt levels dropped to an alarming level.

The biggest surprise came from the aviation unit, which reported a 5.7% increase in sales and a 22% increase in orders, even after Boeing & # 39; s (NYSE 🙂 737 MAX was grounded. GE Aviation, through a joint venture with France & # 39; s Safran (PA :), makes the Leap engines for the narrow-body jet, which was involved in two fatal crashes last year.

While the MAX ground continues to act as a major brake on GE Aviation's cash flows, the division's sales improve as demand for its Leap engine increases, which is also used to power the Airbus Group (PA 🙂 A320neo to float. GE said it expects a MAX return in mid-2020, in line with Boeing's forecast.

On the other hand, the power business of the company continues to struggle. Both energy and renewable energy sources are likely to continue to burn cash in 2020, with power improvement from the negative $ 1.5 billion in cash flow in 2019 and renewable energy sources that see a deterioration of the negative $ 1 billion that the unit saw last year.

Analysts on the street sound a little more positive about the company, citing improvement in cash flows. Bank of America has upgraded GE & # 39; s stock to buy. Deane Dray, an analyst at RBC Capital Markets, said the 2020 FCF forecast should provide GE shares with an upward momentum.

Currently, seven out of 17 analysts have a & # 39; buy & # 39; rating on GE shares, two recommend selling, while six have a & # 39; assign hold & # 39; rating, with an average price target of $ 12.75 for the next 12 months.

Bottom Line

The restructuring of GE is certainly showing signs of momentum and it could very well hold out this year. Despite this optimism, investing in GE remains a risky bet because so many things can go wrong, especially when the aviation and energy companies are faced with uncertainty.

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