What happened
General Electric (GE 1.30%) stock is on a tear, rising 6.2% through 10 a.m. EST Tuesday and hitting its highest price since early March. Investors who own this industrial bellwether can thank the friendly analysts at Oppenheimer & Co. for the gains.
This morning, Oppenheimer upgraded General Electric stock to outperform and set a $12 price target on the (formerly) $10 stock.
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So what
As Oppenheimer explained, GE's sale of its biopharma division to Danaher earlier this year, which netted a $20 billion purchase price, has greatly improved GE's financial position. Net debt levels are down ($34.6 billion even including pension obligations) and cash balances are up (to $24.3 billion), according to a write-up on StreetInsider.com. GE now has the option, says the analyst, of deploying its cash to grow the business, to make pension fund contributions, or to retire preferred stock in the coming year, as management thinks best.
At the same time, GE is restructuring its business to improve profitability, cutting costs in its healthcare, renewable, and aviation divisions, and is consequently improving its operating leverage.
Now what
The analyst argues that "the pace of manifest improvements picking up, as [cost cutting] becomes culturally reinforcing and [CEO Larry] Culp's turnaround gain[s] traction."
Granted, GE's free cash flow situation still doesn't look great this year. But looking ahead to 2021 and 2022, Oppenheimer sees upside to these free cash flow forecasts -- and Oppenheimer isn't alone in thinking this.
According to forecasts collected by S&P Global Market Intelligence, most analysts expect GE to burn cash this year. But by next year, free cash flow could turn positive to the tune of $2.4 billion, and then grow 67% to $4 billion in 2022 -- or more.
