It's a new year, with vaccines offering a possible return to a slightly more normal existence and soon a new administration. One thing that isn't changing, however: J.P. Morgan analyst Stephen Tusa 's negative view of General Electric stock.
He panned shares again in a Thursday research report: "It's 2021, do you know what you own? GE (ticker: GE) stock has decoupled from long-term fundamentals." For Tusa, it's still about free cash flow and how much of that GE can generate when things get back to normal.
Things were far from normal in 2020. Commercial aerospace—the company's largest business —was hammered by the Covid-19 pandemic. Shares bottomed out below $5.50 in May, but they recovered, closing the year down only about 3%.
In 2021 so far, the stock has actually had a strong start, up about 4.4%. The S&P 500, for comparison, is up a little less than 1.3% year to date.
Hopes that more stimulus spending could lead to a faster economic recovery and more green energy spending—which benefits GE's renewable power sales—are buoying shares.
But Tusa isn't buying the renewed optimism. "The narrative of a fundamental turnaround is....at odds with net negative business fundamentals," he says. He doesn't believe recent stronger-than-expected free cash flow generation can be extrapolated into the future.
Back before GE ran into problems—which led to the hiring of its first CEO from outside in the company's history late in 2018—the Wall Street consensus believed GE could generate about $2 in free cash flow a share on a "normalized" basis. That supported the stock price, and stock price targets, of around $30 a share.
"The old $2 now is now $0.75," writes Tusa. At the same multiple, 75 cents makes GE stock worth about $11.25 a share. But multiples for all stocks have risen since 2018. The multiple on the S&P 500 has risen from about 17 times forward year estimated earnings to about 22 times that amount.
But 75 cents is too optimistic for Tusa. His "normalized" free cash flow per share is closer to 38 cents—about half of what he thinks his peers, and investors, are assuming.
It's a bearish take, but Tusa still rates shares the equivalent of Hold. He doesn't have a price target currently, but his most recent price target—set when he rated shares Hold in early 2020—was $5 a share. That old target price would work out to about 13 times the 38 cents figure.
In November, Oppenheimer analyst Christopher Glynn upgraded GE stock to Buy from Hold in November. His $12 price target is based on 20 times 60 cents in normalized free cash flow per share. He thinks there is upside to 70 cents a share, close to what Tusa believes is the Street consensus, as aerospace recovers.
The difference between a prominent GE bull and bear comes down to about 30 cents of free cash flow per share and 7 valuation multiple points. Based on GE's 8.8 billion shares outstanding 30 cents works out to about $2.6 billion annually.
Tusa's take is more bearish than Glynn's. It's also more bearish that most peers. About 60% of analysts covering share rate them Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 57%. GE stock is a little better than average, according to the Wall Street consensus. But no analysts rate shares Sell. That's a little unusual. The average Sell-rating ratio for stocks in the Dow is about 7%.
The average analyst price target is close to $12, a little above where shares are trading. GE stock is up 0.6% in early trading to $11.42.
Long-term free cash flow generation is critical for all stocks, including GE, but with the turmoil of 2020, investors, meanwhile, just want to see progress—both internal and external progress. Investors want to see air travel recover and GE continue to cut costs and pay down debt.
The company's debt goal has been to reduce debt held outside of its finance arm, GE Capital, to no more than 2.5 times Ebitda generated by its industrial business units—like aviation. Ebitda is short for earnings before interest, taxes, depreciation, and amortization. GE paid down almost $17 billion in debt in 2020.
Debt is down, but so is Ebitda due to the brutal 2020 operating environment. Investors will have to wait a little longer for the company to hit that goal. GE generated, very roughly, $13 billion in industrial Ebitda in 2019. That is down to about roughly $8 billion over the past year.
Tusa hasn't rated GE stock Buy since 2013 and has been Sell-rated for much of that time. It's worth noting that GE stock was more than $20 back then.
GE stock closed down 0.8% to $11.27 Thursday.