GE earnings: Stock has rallied while earnings estimates have dropped. Will investors or analysts be right this time?

A similar dynamic had occurred ahead of GE’s much-anticipated investors day on March 10, as the stock GE, +0.48% tumbled 12.4% in two days despite the company announcing a $30 billion deal to combine its aircraft leasing business with AerCap Holdings NV AER, +0.58% and provided guidance that was mostly in line with expectations. Some analysts suggested the post-investor day selloff was a result of investors being too bullish, as the stock had run up 30% in the year to date ahead of the meeting, and closed at a near 3-year high two days before the meeting.

Since the industrial conglomerate reported fourth-quarter results on Jan. 26, the FactSet consensus for earnings per share (EPS) has dropped 67% and for revenue has fallen 5.1%, with estimates for three of GE’s four business units declining. Meanwhile, the outlook for industrial free cash flow (FCF) is now more than four-times more negative than it was three months ago.

And yet GE’s stock, which rose 1.9% in midday trading Monday, has climbed 22.2% since the end of January. In comparison, the SPDR Industrial Select Sector exchange-traded fund XLI, -0.24% has advanced 16.7% since the end of January and the S&P 500 index SPX, +0.13% has gained 8.7%.

As an example of the difference in the outlook for earnings and the stock, UBS analyst Markus Mittermaier recently raised his stock price target to $17 from $15, citing an acceleration of the transformation into a “simpler” company, but trimmed his first-quarter EPS estimate to 2 cents from 3 cents, and cut his 2021 outlook to 26 cents from 29 cents.

The numbers

Earnings: The average estimate of the 17 analysts surveyed by FactSet is for adjusted first-quarter EPS of a penny per share, down from 5 cents a year ago. On Jan. 29, the FactSet EPS consensus was 3 cents.

Estimize, a crowdsourcing platform that gathers estimates from buy-side analysts, hedge-fund managers, company executives, academics and others, has a much higher consensus EPS estimate of 4 cents.

Revenue: The FactSet consensus for revenue is $17.59 billion, down from $20.52 billion a year ago. The consensus has fallen by nearly $1 billion, from an $18.54 billion estimate as of Jan. 29. The Estimize revenue consensus is at $17.91 billion.

For GE’s business segments, the FactSet revenue consensus for Aviation has fallen to $5.28 billion from $5.39 billion on Jan. 29, has declined for Power to $4.00 billion from $4.16 billion and has slipped for Healthcare to $4.09 billion from $4.10 billion. The estimate has increased for Renewable Energy to $3.26 billion from $3.22 billion.

Industrial free cash flow: The average FCF estimate, of the two analysts who provided estimates to FactSet, is now negative $1.21 billion, with a range of negative $870.0 million to negative $1.55 billion. On Jan. 29, the range was negative $747.0 million to positive $216.0 million.

Stock movements

• GE shares have rallied the after the past two earnings reports, by an average of 3.6%, after falling by an average of 3.8% after the previous two earnings reports. Over the past 10 earnings reports, the stock has gained six times, for an average gain of 7.5%, and fallen by an average 4.3% after the other four reports.

• Options traders have prepared for a smaller-than-usual stock move after GE’s earnings report. An options strategy known as a straddle, which is designed so the buyer of the straddle makes money if the stock moves, in either direction, more than the straddle pricing implies, has been priced for a 67-cent move on Tuesday, according to data provided by Option Research & Technology Services (ORATS). That compares with the average price move over the past 12 quarters of 80 cents, ORATS said. Based on current prices, a straddle buyer would make money if the stock moves 4.9% in either direction. Read more about straddles.

• Since the end of January, the percentage of Wall Street analysts surveyed by FactSet with the equivalent of buy ratings has declined to 60% from 68%, while the percentage of analysts with hold ratings increased to 40% from 32%. No analysts have the equivalent of sell ratings on GE’s stock.

• Baker Hughes Co.’s stock BKR, +0.47% closed out the first quarter at $21.61, or up $11.11, or 105.8%, from where it closed out the same quarter a year ago. GE said in its fourth-quarter earnings report that it owned a 30.1% stake in Baker Hughes. As of April 16, Baker Hughes said it had a total of 1.04 billion Class A and Class B shares outstanding, which means GE’s held about 313.5 million Baker Hughes shares as of the end of January. A $11.11 price gain on that number of shares would equate to roughly $3.5 billion. Last year, GE recorded a $4.6 billion loss on its Baker Hughes stake.