Text size

Analysts are adjusting numbers ahead of General Electrics first-quarter earnings, due next week. And the commercial-aerospace debacle is weighing on Wall Streets target prices for GE shares.

UBS analyst Markus Mittermaier cut his price target for General Electric shares (ticker: GE) to $9 from $12 on Thursday. He still calls the stock a Buy and his price target is still 38% above recent levels.

Citigroup analyst Andrew Kaplowitz cut his price target for GE shares to $9 from $11. He also still rates shares Buy.

Despite the target price cuts, GE stock was up 2.3% Thursday morning. Predicting stock reactions in a Covid-19 world isnt as easy as it used to be. A lot of bad news is already reflected in GE shares.

The stock is down 42% year to date, worse than the comparable drops of the Dow Jones Industrial Average, S&P 500 and other industrial companies. The Industrial Select Sector SPDR EFT (XLI) is down about 24% year to date.

GE is a large industrial conglomerate, but its largest business is making jet engines and commercial aerospace has been hammered by the Covid-19 pandemic. Aerospace suppliers Barrons tracksincluding GEare down about 48% year to date. Boeing (BA) shares are off 58%. Stock in airlinesthe companies which ultimately buy the planes and jet enginesare down roughly 60% year to date.

The path forward for commercial aerospace looks rough. Aerospace related headwinds in particular [are] an evolving headwind that could materially pressure results [versus] our prior expectation, Kaplowitz wrote in his Thursday research report. The International Air Transport Association cut its 2020 traffic estimate to down 48% year over year. About 17,000 planes, or 64% of the global fleet, are parked because of no demand.

The outlook is hitting earnings estimates in 2020 and 2021. Kaplowitz cut his 2020 and 2021 earnings estimates by two dimes, to 20 cents and 45 cents a share from 40 cents and 65 cents a share, respectively.

Commercial aviation faces unprecedented challenges, Mittermaier wrote. He assumes a return to 2019 commercial air-travel demand in 2024. He cut his 2020 and 2021 earnings estimates, as well, to 8 cents and 41 cents a share, respectively.

Not everyone is as bearish on the outlook for GEs aviation business. Stalled but not broken, wrote Bank of America analyst Andrew Obin in a Wednesday research report. Covid-19 has stalled commercial aerospace but airlines cant avoid aftermarket services, he said.

It might take years for demand for new planes to recover, but he thinks GEs aftermarket parts-and-service business will rebound much faster. Whats more, profit for aftermarket service is higher than for new engines. New equipment is sold at essentially break-even levels. The money is made in services. As a result, Obin thinks GE aviation profit margins will approach prior levels by 2022.

He rates shares Buy and has an $11 price target for the stock. His 2021 estimates are actually below the other two analysts, at 35 cents a share. But he has earnings rebounding to 63 cents a share in 2022.

The other two analysts also see a 2022 uptick. Kaplowitzs 2020 GE estimate is 55 cents a share. Mittermaiers number is 70 cents a share. It is tough to value stocks on 2022 earnings, but GE shares are trading for roughly 10 time the average of the three estimates. The S&P 500 trades for about 14.8 times 2022 estimates.

The shape of the aerospace recovery is still up for debate. That is one reason for the valuation discount. Aerospace was one of the best-performing industrial end markets for the past decade, before Covid-19 upended everything.

Write to Al Root at allen.root@dowjones.com

Read the original post:

GE Stock Is Still a Buy, Analysts Say. Heres Why, and Where It Might Go. - Barron's