JPMorgan's Stephen Tusa also lowered his price target on GE shares to $5
Shares of General Electric (GE) are under pressure on Monday after JPMorgan analyst Stephen Tusa downgraded the stock to Underweight from Neutral. Many investors are underestimating the "severity of the challenges and underlying risks" at GE, while overestimating the value of "small positives," according to Tusa, whose upgrade of the stock to Neutral from Underweight in December drew an equal amount of attention.
SELL GENERAL ELECTRIC: In a research note on Monday, JPMorgan's Tusa downgraded General Electric to Underweight from Neutral and lowered his price target on the shares to $5 from $6. With the stock up 38% year-to-date, the analyst believes many investors are underestimating the "severity of the challenges and underlying risks" at GE, while overestimating the value of "small positives." Further, Tusa noted that he believes the Street is "significantly over projecting" the bounce in free cash flow in the coming years, off levels that he calculates at zero currently, as Power/Renewables remains weak, General Electric Capital Services will likely consume material cash for the foreseeable future, and Aviation fundamentals, as per underlying free cash flow, are weaker than meet the eye. Lingering sector high leverage including entitlements also leaves the company vulnerable to liquidity issues in the event of a recession, he contended. The analyst questions "why some on the Sell Side appear to be cutting billions out of free cash flow estimates but maintaining price targets." Overall, Tusa believes the risk/reward has tilted back negative given the significant move in the stock since December, with GE operating through a "very difficult period," borne from a combination of over a decade of leverage issues that, combined with challenged end markets and intensified competition, have left the company with significant liabilities and little free cash flow to support them.
WHAT'S NOTABLE: Last month, General Electric's CEO Larry Culp said that the company could burn as much as $2B more in cash than it makes in 2019. "GE's challenges in 2019 are complex but clear. We are facing them head on as we execute on our strategic priorities to improve our financial position and strengthen our businesses. We have work to do in 2019, but we expect 2020 and 2021 performance to be significantly better with positive Industrial free cash flow as headwinds diminish and our operational improvements yield financial results. We will continue to take thoughtful actions to reduce downside risk and increase upside optionality to create long-term value for our shareholders," Culp said, adding that 2019 is expected to be a "reset year."
PRICE ACTION: In morning trading, shares of General Electric have dropped 69c, or almost 7%, to $9.32.