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General Electric (GE) is in the midst of a restructuring phase and the goal it has set out to achieve is no pipedream, thinks Wells Fargo’s Joseph O'Dea.
“GE management has done a good job of taking a complicated set of considerations and distilling them down to a single, primary focal point: high-single-digit FCF margins in 2023+,” the analyst recently said.
The Street expects GE to hit the target and so does O'Dea; the analyst’s forecast calls for a 7.8% adjusted industrial free cash flow margin in 2023.
Driving the progress toward the FCF target are expectations of improving industrial operating profits. Between 2020 to 2023, O'Dea anticipates $7.5 billion in “operating profit improvement,” of which Aviation should account for 57%, Renewable Energy 18%, Power 13%, and lastly, Healthcare at 9%.
As Aviation carries most of the weight here, a big issue to consider revolves around the anticipated recovery of air travel. More specifically, can demand return to 2019 – or pre-covid - levels by 2023/24?
GE anticipates that by 2023, narrow body aricrafts’ recovery will be back to pre-Covid demand levels, and widebody recovery will be completed the following year. While the “timing is out of GE’s hands,” O'Dea anticipates recovery too, believing it to be a “matter of when, not if.”
The other main issue on the table concerns “self-help/operational execution required to reach margin targets.”
That is dependent on the performances of the Power and Renewable Energy segments. For the former, margin expansion will be attained via an “exercise in addition by subtraction.” And this is dependent on “reduced project activity and improved execution within Gas Power, and exiting new unit coal activity within Steam Power.” While for the latter, a mix of “self-help and structural tailwinds,” will be the path to higher operating profit and margins.
So, with GE expected to meet its target, all that is left to consider is the valuation. And here, from an investment point of view, the analyst is less certain about the opportunity, believing the shares are “fairly valued.”
As such, O'Dea initiated coverage of GE with an Equal Weight (i.e. Hold) rating and $107 price target, which suggests the stock will remain range-bound for the foreseeable future.
Overall, GE stock boasts a Moderate Buy consensus rating, based on 7 Buys vs. 5 Holds. (See GE stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.