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Wall Street isn’t expecting much from industrial companies when they start reporting second-quarter earnings in a week or so. The question for investors is with stocks already down, how will shares react to guidance cuts, misses, or reports of demand weakness?
Morgan Stanley analyst Joshua Pokrzywinski says it is safer to avoid
General Electric
(ticker:
GE
) stock headed into earnings. Second-half “expectations need to come down,” wrote Pokrzywinski in a Tuesday report. “Even though shares have more than discounted a slower improvement in Healthcare supply chain and Renewables’ profitability.”
Healthcare’s operating profit margin fell almost 4 percentage points year over year in the first quarter. And losses in GE’s renewable power business widened compared with the fourth quarter of 2021.
GE earned 24 cents a share in the first quarter and is expected to earn 38 cents a share in the second quarter. That’s 62 cents a share in the first half of 2022. Full-year earnings estimates are at about $2.81 a share. That leaves GE earnings expectations in the second half at $2.19 a share.
That’s too high for Pokrzywinski, even though the fourth quarter of the year tends to be the best period for GE. He sees the company earning about $2.06 a share in the final two quarters of 2022.
GE shares rose Tuesday, despite the warning. The stock was recently 2.5% higher at $63.44, while the
S&P 500
is down about 0.2%.
GE stock might not be down because this isn’t the first warning. J.P. Morgan analyst Stephen Tusa recently wrote that GE’s 2023 earnings estimates were too high. He cut his GE price target to $50 from $55 a share.
And Barclays analyst Julian Mitchell cut his price target for GE stock to $81 from $96 this past week. He also cut the price targets for 25 of the 26 stocks under his coverage and wrote that he expects up to 30% of the companies he covers to cut full-year earnings guidance.
Inflation and rising interest rates have started to slow demand.
Coming into Tuesday trading, GE stock is off about 34%. Industrial stocks in the S&P 500 are off about 17% on average.
Investors now have to decide if GE, or any other industrial stock, has fallen far enough to be attractive.
In the case of GE, Mitchell and even Pokrzywinski see opportunity. Both rate shares Buy. Pokrzywinski’s target went to $95 from $100 in his Tuesday report. Tusa, however, rates shares Hold.