GE shares to rally 28 percent on higher earnings and lower taxes, Bernstein says

Published Fri, Dec 16 201611:21 AM EST

Shares of General Electric could rally 28 percent to $40 in the next 12 months as the Dow Jones industrial average component restructures its portfolio of businesses, grows earnings and benefits from lower corporate taxes, according to Bernstein analysts. The firm upgraded the stock to outperform from market perform on Friday. "Yes GE is often unloved, but the changes are big and they have come fast and furious in the last 3 years," analyst Steven Winoker wrote in research note. "Our discussions with GE leadership across the segments give us increased confidence in their ability to execute from here, including on earnings and cash." This year, shares of GE have underperformed the market, showing a slight gain against a 14 percent increase for the Dow. General Electric, 1 year Source: FactSet The stock's underperformance this year, however, might be a buying opportunity, Bernstein said, noting compelling valuations and the potential for earnings growth ahead. Winoker writes: "As we now look forward, our view of earnings growth has remained consistent, the portfolio has changed even more for the better (with BHI, Appliances, Water, Industrial Solutions, Capital etc.), and our concerns about risk for Alstom restructuring in Europe have mitigated. Moreover, industrial profit growth and cash flow conversion now look set to improve markedly by low-teens and 10 points respectively on Power/Aviation/Healthcare strength, incremental cost out actions plus working capital management and we now have a new set of catalysts in the form of potential tax reform, regulatory relief and other factors that should lift GE's businesses beyond 2018. Compensation incentives are also aligned." The analyst notes that GE has $10 billion of additional capital available for deployment, which he expects to be distributed back to investors in the form of higher dividends, additional buybacks and other corporate actions that could boost the shares. GE currently pays a dividend yield of 3 percent, one of the highest rates among Dow companies. At current levels, the stock trades at 19 times forward earnings, a valuation metric that's inexpensive, given the solid upside potential, even when lower taxes aren't factored in, Winoker said. —CNBC's Michael Bloom contributed to this story.

An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.

Sebastien Bozon | AFP | Getty Images

The firm upgraded the stock to outperform from market perform on Friday.

"Yes GE is often unloved, but the changes are big and they have come fast and furious in the last 3 years," analyst Steven Winoker wrote in research note. "Our discussions with GE leadership across the segments give us increased confidence in their ability to execute from here, including on earnings and cash."

This year, shares of GE have underperformed the market, showing a slight gain against a 14 percent increase for the Dow.