Ousted from the Dow and down 80% from all-time highs, it would seem as though General Electric Co. (GE) has hit rock bottom. But the company is still in the game at a total market capitalization of nearly $120 billion and with new CEO John Flannery and CFO Jamie Miller at the helm, rock bottom might be the turning point at which there is nowhere to go but up. The new management, as well as plans to divest from certain units and streamline its business, is gaining praise from a chorus of bullish analysts. One of those bulls is Gabelli analyst Justin Bergner, who thinks GE could be trading at $20 by the end of fiscal year 2019, implying more than 45% upside, according to Barron’s.
What Gabelli Likes About GE
|Sum of the Parts|
|GE Capital Turnaround|
|Healthcare Unit Spinoff|
Lots to Be Positive About
Bergner has earlier expressed his optimism about the new CEO and CFO and the ways in which they are restructuring the company, writing that they “are taking the right steps to drive free cash flow, surface asset value, and simplify the company,” according to a separate article by Barron’s. (To read more, see: GE Stock to Gain 50%: William Blair.)
More recently he has expressed optimism from a sum-of-the-parts valuation perspective, which he bases on his own earnings-decomposition estimates. While acknowledging that other analysts are skeptical, including Barron’s own Andrew Bary, who claimed back in May that “the stock doesn’t look cheap based on a sum-of-the-parts analysis,” the stock has since declined further and Bergner believes that the stock can hit the $20 price target by fiscal 2019.
Investors are also skeptical of GE Capital, GE’s financial services unit, but Bergner anticipates a $3 billion equity contribution to put the segment “back on track.” As for other business units, GE plans to sell its stake in oil services company Baker Hughes and divest from its Healthcare unit. Bergner sees the Healthcare spinoff as a “game changing catalyst to de-lever the balance sheet, surface asset value, and simplify GE, while giving HC its own autonomy in a fast-changing healthcare environment,” according to Barron’s. (To read more, see: GE Plans to Spin Off Health-Care Unit, Sell Baker Hughes Stake: Report.)
Despite the new rising optimism, there are still many concerns, including the longer-term struggles of GE’s Power in the rapidly-changing energy environment, GE Capital’s hidden liabilities from offering financing services unrelated to its core industrial business, weak cash flow, a weak balance sheet, and the complexity of GE’s overall business making it very difficult to manage.
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