UBS Analyst Upwardly Revises GE’s Rating to “Buy”

UBS Analyst Upwardly Revises GE’s Rating to “Buy”
December 13, 2019

 

The shares of General Electric Co (NYSE: GE) surged $0.47 or 4.28% to close at $11.44 after Markus Mittermaier, a new analyst at UBS, began his coverage of the industrial behemoth with a “buy” rating. Earlier, the company carried a neutral (“hold”) rating. Including yesterday’s gain, the shares have appreciated by 43% since August, when alleged accounting issues resulted in the battering of the stock.

Markus Mittermaier forecast the year 2020 to be an ‘inflection point’ for the enterprise and its continuing rebound under CEO Larry Culp. The analyst further argues that there is a considerable improvement in the balance sheet of the industrial giant, and it will lead to robust cash flows in 2020, leading to a change in investor and analyst view of the company. Specifically, Mittermaier states that CEO Lawrence Culp Jr.’s leadership will result in “significant cash drag to successful transformation.”

The UBS analyst stated that he expects industrial free cash flow to increase to about $2.30 billion in 2020. He further underlined that the drag on cash flow from renewable energy and power unit should ease by roughly $2 billion.

Notably, GE upwardly revised its FY 2019 industrial cash flow outlook in October, while reaffirming its profit forecast, after a better-than-anticipated Q3 earnings report signaled that Culp’s reversal plans are gaining momentum. In its quarterly report, GE had stated that it still anticipates adjusted earnings per share of between $0.55 and $0.65 for fiscal 2019. Cash flow, a measure of efficiency, is anticipated in a range from flat to $2 billion in 2019, an increase from its prior forecast range of between negative $1 billion and positive $1 billion.

Before the third-quarter results were released, GE stated that it would minimize its pension-related obligations by a maximum of $8 billion, with additional debt cut in the forthcoming months, leading to a light balance sheet reflecting financial efficiencies. This implies bringing its pension plan covering 20,000 employees with salaried benefits to a halt. The plan also involves limiting additional benefits for roughly 700 employees. The process, if it succeeds, will slash the overall debt by $4 billion to $5 billion.

Before the announcement was made, GE’s pension plan was assessed to have a shortfall of $31 billion in meeting obligations for roughly 620,000 of the existing and former workforce. Almost 430,000 of them are covered under US pension rules. GE’s total liability is estimated to be $92 billion. The company has assets worth $62 billion.

The company’s CEO is targeting revenue of roughly $38 billion to reduce its debt and pension obligations. Based on the above facts, UBS analyst Markus Mittermaier upwardly revised his price target on GE stock to $14 per share, from $12.50 forecast earlier.

In a note to clients, the analyst explained how he arrived at a conclusion. Mittermaier said, “We question the depth of which consensus captures the ongoing GE evolution. 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.”

Earlier in 2019, Culp entered into a contract to divest GE’s Biopharma unit to Danaher Corp (DHR). He further stated that the company would bring down its stake in Houston-based oil services group Baker Hughes (BHGE) to below 50% and generate $3 billion, which would be used to slash its overall debt.

To sum up, in his note to clients, Mittermaier wrote, “We think investors today can get exposure to a much narrower conglomerate (vs. ~12 months ago) with leading industrial franchises (Aviation and Healthcare) at a discounted relative valuation. We expect an inflection in free cash flow, with 2020E industrial FCF of ~$2.3B (up from $0.7B in 2019E) and a medium-term trajectory of $5-6B+, moving cash conversion up towards 70%+ (from a dismal 13% last year) as the turnaround progresses.”

The bullish view of the analyst is expected to keep the stock of GE in an uptrend in the days to come.

Technically, shares of GE have closed above its 50-day moving average. Furthermore, the stochastic oscillator is in the bullish zone. Therefore, we are anticipating the stock to move up in the short-term.

GE - technical analysis - 13th Dec 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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