Goldman Sachs Resumes Coverage on GE With a ‘Buy’ Rating

Goldman Sachs Resumes Coverage on GE With a ‘Buy’ Rating
October 12, 2020

 

General Electric Co. (NYSE: GE) hogged the limelight on Friday after Joseph Ritchie, an analyst at Goldman Sachs, restarted coverage of the engineering conglomerate by issuing a “buy” rating, citing that the stock has hit its rock bottom in comparison to its fundamentals. Notably, the stock had declined last week after receiving a “Wells notice” from the SEC. The notice signals that the SEC will soon begin enforcement action against the company. Nevertheless, the stock has started appreciating after the release of Ritchie’s note to clients.

On Friday, the stock closed at $6.84, up $0.19 or 2.85% from the prior close. So far this year, the stock has lost 38.4% as many of its business divisions, including energy and aviation, continue to face issues.

The analyst has pointed out that from the time CEO Larry Culp took the helm in 2018, the company has transformed into a slimmer and structurally efficient enterprise. He also believes that the company will come out of the COVID-19 pandemic in a robust manner.

Goldman Sachs stopped rating GE in February 2019 as the bank was acting as advisory. Before stopping coverage, Goldman had issued a ‘neutral’ rating to GE.

In a note to clients, Ritchie wrote, “Admittedly, we might be a little early on the turn in the stock, but we believe we are at a bottom from both a fundamental and sentiment perspective, and that is typically the best time to own industrial cyclicals.”

While reporting its June quarter results, GE revealed that its aggregate orders had declined 38%, while revenue slumped 24% compared to the similar quarter last year. Furthermore, the company reported a cash flow of negative $2.10 billion.

Nevertheless, the CEO of GE expressed optimism about the results. He stated that the company’s cash flow, despite being negative, was better than anticipated. More importantly, he noted that the improvement was due to the actions taken so far. Regarding earnings and cash flow in the second half of 2020, he said, “sequential improvement in earnings and cash in the second half of the year is achievable.”

The company has taken necessary actions to preserve costs, raise capital to enhance liquidity, and minimize debt by divesting businesses, including biopharma and lighting divisions. Impressed with Culp’s strategy, the company’s board has also extended his contract by two more years.

The analyst acknowledged that the negative cash flow could aggregate to $3.20 billion this year. Ritchie trusts that there will be marked improvement in cash flow as the company undergoes a turnaround in its higher-margin businesses.

The company’s aviation business was subject to a double whammy of COVID-19 and Boeing 737 Max crash related issues. Sill, Goldman believes that the recovery will begin soon.

Goldman further stated, “We are simply making the call that as General Electric’s higher-margin businesses recover, free cash flow will improve materially given the restructuring actions that the COVID-19 pandemic accelerated.”

Goldman expects a reversal in the performance of the aviation division and an improvement in free cash flow, led by a solid rebound in power and renewable business division. The bank acknowledged that it could be too soon to bet on a turnaround. Goldman’s explained the reason for predicting a turnaround in operations: “We believe we are at a bottom from both a fundamental and sentiment perspective.”

The analyst refers to the stock as the “ultimate self-help, vaccine-leverage story in Industrials.” Based on the above arguments, Ritchie has given a price target of $10 for the stock, reflecting a premium of about 50% from Friday’s close.

In its conclusive statement, Goldman said: “The bottom line is we think GE is the best self-help, vaccine story across Industrials and see 50% upside to our $US10 12-month price target.”  

Goldman has cautioned that the forecast is based on the assumption that a COVID-19 vaccine will be available, and air travel would resume in the next 12 months.

Regarding the likely impact of a COVID-19 vaccine, Ritchie wrote “Our base case assumption is that a vaccine will be mass distributed over the next 12 months and, under this scenario, we believe the second derivative improvement on the resumption of air travel will be significant and many of the underlying concerns on GE’s balance sheet will fall to the background.”

The “buy” rating issued by Goldman Sachs is expected to keep the stock slightly bullish in the short-term.

Technically, the stock is having strong support at 6. The next resistance is anticipated only near 10. The stock has closed above its 50-day moving average. Furthermore, the stochastic oscillator is also ascending. Therefore, we are expecting the stock to remain in an uptrend in the near-term.

ge - technical analysis - 12th October 2020

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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