General Electric stock has gained 60% in six months on hopes for an improving economy and a robust recovery in air travel after Covid-19 vaccines are widely distributed. J.P. Morgan's Stephen Tusa , however, doesn't think the run is justified and recommends his clients avoid the stock.
Tusa is a longtime General Electric (ticker: GE) bear. He has rated shares either Hold or Sell since 2013 . Overall, he has been right over that long period. The stock was about $22 a share when he turned bearish, and trades at about $11 recently. What's more, quarterly dividends were rolling in at a rate of 23 cents a quarter in 2013. They have since been cut to 1 cent per quarter.
Still, a lot has changed at GE since 2013. The company has a new CEO, Larry Culp , who has prioritized paying down debt and shrinking GE Capital. Things, under Culp, were looking up, with shares trading above $13 in early 2020 before the pandemic hit. Then Covid-19 decimated demand for commercial air travel. GE's largest and most profitable business unit makes jet engines .
Tusa's recent problem with GE isn't about aviation. It's about another one of its big divisions: natural gas-fired power generation. Gas-power sales accounted for about 15% of GE's total in the third quarter of 2020.
Simply put, Tusa believes gas-fired power generation is in secular decline. "GE itself understands the challenges are structural," writes Tusa in a Thursday research note. He points out that GE—in its own marketing materials—writes that gas-fired power generation is expected to decline in coming years. GE, for its part, is selling services with its marketing materials, promising to help utilities manage maintenance costs and asset utilization now and in the future.
To be sure, some GE businesses face challenges, but Tusa's view isn't the consensus on Wall Street. Overall, 13 out of 22 analysts, or about 60%, covering the company rate shares Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 57%.
GE has no Sell ratings—Tusa rates shares Hold now. The lowest price target on the Street, $7, is from Gordon Haskett analyst John Inch . Tusa doesn't have a price target, but the last one he had was $5 a share.
Bank of America analyst Andrew Obin , meanwhile, rates GE shares Buy and has a $13 price target for the stock. He previewed GE's coming quarterly earnings in his own Thursday research report. He models falling GE Power sales year over year, but expects cost-cutting and service sales to improve profit margins in years to come. GE is targeting cost reductions of $1 billion in the power division in 2021.
More important for Obin, he expects GE's total free cash flow as an enterprise to improve in coming years.
The views of Obin and Tusa reflect the overall bull-bear debate on GE stock. The bulls have the upper hand for now. The direction of the 2021 economic recovery will probably decide who appears right over the coming year.
GE stock slipped 0.8% in midday trading. The S&P 500 is up 0.2%.