Shaky Short Term for GE, but Long-Term Outlook Remains

Nothing in GE’s GE first-quarter results alters our current long-term view of the firm. However, the tepid datapoints GE CEO Larry Culp revealed on the first-quarter earnings call during his commentary did cause us to revisit our near-term assumptions. The market mostly shrugged off the news during the early part of the trading day, before seeing the stock trade off just over 3% by market close. There is no sugarcoating the circumstances surrounding GE’s immediate future.

That said, the market’s initial reaction to the news was correct, in our view. We tweak and slightly reduce our fair value to $10.60 (from $10.80 previously). We now forecast modest free cash flow burn of nearly negative $700 million in 2020, an end of year 2020 net debt/EBITDA of nearly 6 times (we already modeled a high cost of debt capital previously in our cost of capital assumptions), as well as adjusted EPS of 17 cents, 54 cents, and 80 cents in 2020, 2021, and 2022, respectively. While our forward adjusted P/E ratio in 2020 is very high for this historic trough year, it tapers to a peer discount of 13.25 times 2022 adjusted EPS. We still forecast a high-single-digit free cash flow yield in the outer two years of our three-stage discounted cash flow model.

There are various puts and takes to our model, and both the immediate magnitude and cadence of any recovery is hard to precisely prognosticate, we believe we already appropriately scoped the damage to GE’s long-term intrinsic value during one of our recent prior model updates (three iterations ago--our current fair value is 24% lower than in the pre-COVID-19 world). Given the price of where GE trades in the market, we believe that the risk of investing in GE shares is consequently lower than it has been since December of 2018 when we last made a 5-star call on GE (in the period prior to March 2020).

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