Shares of General Electric (GE) are on the rise after JPMorgan analyst Stephen Tusa upgraded the stock to Neutral and removed the shares from his firm’s Analyst Focus list as a short idea as he now sees a more event-driven, balanced risk/reward at current levels. Separately, General Electric said it was launching a $1.2B industrial Internet of Things software company and selling a majority stake in its ServiceMax to private equity group Silver Lake.
PROMINENT BEAR MOVES TO SIDELINES ON GE: In a research note to investors this morning, JPMorgan’s Tusa upgraded General Electric to Neutral from Underweight, with an unchanged price target of $6, and removed it from his firm’s Analyst Focus list as a short idea. He now sees a more event-driven, balanced risk reward at current levels. Key to the story, in his view, is the outcome of the “known unknowns” in near-term, which he believes are better understood and around which the debate is more balanced, as opposed to being overlooked by most bulls in the past. The analyst added that he now thinks a more negative outcome on these liabilities is at least partially discounted, and it is possible that the company can execute its way through an elongated workout that limits near-term downside. On the flip side, Tusa is increasingly assuming a material equity raise could be necessary. In this instance, while he believes there would be near-term downside, the analyst also thinks there could be support at a lower level, and likely a benefit of the doubt for new management with a higher multiple on lower earnings and free cash flow.
NEW IOT COMPANY, SALE OF STAKE IN SERVICEMAX: Meanwhile, General Electric has announced plans to establish a new, independent company focused on building a comprehensive Industrial Internet of Things software portfolio. The company will start with $1.2B in annual software revenue and an existing global industrial customer base. The company is intended to be a GE wholly-owned, independently run business with a new brand and identity, its own equity structure, and its own Board of Directors. The proposed new organization aims to bring together GE Digital's industry-leading IIoT solutions including the Predix platform, Asset Performance Management, Historian, Automation, Manufacturing Execution Systems, Operations Performance Management, and the GE Power Digital and Grid Software Solutions businesses. Additionally, GE announced an agreement to sell a majority stake in ServiceMax to Silver Lake. The transaction is expected to close in the first quarter of 2019, subject to customary closing conditions and regulatory approvals. Additionally, the company said that GE Digital CEO Bill Ruh has decided to depart General Electric to pursue other opportunities. The company intends to conduct an internal and external search to identify the CEO for this new independent company. Further details on GE's new IIoT software company will be announced in the first quarter 2019. The plan is subject to customary regulatory approvals, including information and consultation with employee representatives where required.
PRICE ACTION: In morning trading, shares of General Electric have gained 63c, or 9.4% to $7.34.
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