General Electric stock ‘at a critical juncture’ ahead of spinoff, analyst says

Yahoo Finance Video
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Oppenheimer Senior Analyst Christopher Glynn joins Yahoo Finance Live to discuss upgrading GE to Outperform, the company’s stock performance, industrial stocks, and the outlook for GE’s health care spinoff.

Video Transcript

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- Favorite ticker within the Yahoo Finance community is catching an upgrade today. That is none other than General Electric. Let's chat with the analysts making the call on GE, Oppenheimer's Managing Director and Senior Analyst Chris Glynn. Chris, good to see you here this morning. State your case.

CHRISTOPHER GLYNN: Hey. So GE basically imploded on a number of dimensions in 2017 and 2018. They've made gradual progress on several fronts since then. The stock's been volatile in the meantime.

And we think they're at a kind of critical juncture here, where some value drivers are being revealed through the spinoff process of health care, GE HealthCare will trade independently in the first week of June. They're getting a nice cash contribution from that. The balance sheet is fixed. And some of the longer projects for some of the more stubborn operational fixes are just getting past some of the peak pressures, renewables in particular.

But aviation is performing very well, I would say better than peers, in an environment where the sector is plagued by various supply chain constraints. The power business, which had a central role towards the end of Jeff Immelt's career as CEO, when the stock collapsed, has been a steady, gradual improvement story. And there's room to go there. And they're going to be coming into some legitimate flexibility with their cash balances and capital allocation into 2023 in a way that has not been there for them for the past five years plus.

- Hey, Chris. It's Julie here. So the stock is down about 9% year-to-date. So it's done better than the market, but it's still not done great right on an absolute basis. Do you think when the spin is actually effective in early January that that's going to unlock that potential that we could see in the stock? Are we going to see a big surge at that point in time?

CHRISTOPHER GLYNN: No, it comes down to the fundamentals. I think this call is not related to the timing of the GE HealthCare spinoff specifically. I would say the way that it has been arranged and the financing that has been established for GE HealthCare and the favorable impact on GE's net debt and net cash balances is a derivative with respect of the spin-off.

But really, I think the stock's down year-to-date. And that helps create a backdrop to upgrade it. The reason the stock had been pressured earlier in the year is the renewables business really had a tough year with the real drop in US demand. We're in an interim period between tax credits, which are coming back on. Inflation hurt them pretty severely in that segment.

And the complexity of the business, they have far too many variations of tower variety. And that becomes very difficult to service. They took a very large warranty charge in the third quarter.

So this is sort of the last big fix area for GE. And it's really a classic best fit situation for the turning an ocean liner analogy. So we think the different pieces are coming up together right now, where you can formulate a price target that has some firm footing and some appeal.

- Now, what about turning an aircraft? Because a lot of the thesis here is really based around GE Aviation as well. And so are they able to move through any materials issues that we've seen persist at some point in 2022 and even further out now to hit some of the targets that you've set forth for the aviation side of the business?

CHRISTOPHER GLYNN: Yeah, I think that you are referring to the broader industry supply chain issues, which are legion-- this part, that part from this country or that country or this small supplier or that big supplier causing units up and down the supply chain to go backwards and forwards on lines. GE's actually done a relatively good job on that. They're growing over 20% top line this year. And they're delivering mid 30% incremental margins, operating leverage.

So you might even look at their reported numbers this year and say, what supply chain issues? Their military revenue has been gated. And they have a good program ledger and expected solid compound growth the next several years. That's been pushed out a little bit. But the commercial aftermarket has been very strong. And OEM has been a little bit lumpy, commercial OEM. But it's been good.

You're going to have a mixed headwind next year. So we have flattish margins we're modeling next year. But it should be very strong double digits top line again. And so that'll drive good profit growth for the aviation segment in '23.

- Really solid analysis. Oppenheimer's Managing Director and Senior Analyst Christopher Glynn. Chris, thanks so much for the time.