The analyst who called the fall of GE predicts more problems

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C. Stephen Tusa Jr. declassified GE (GE) to "underweight" Monday and predicted that the stock will be almost cut in half to $ 5 by the end of the year.
In a 123-page research report, the influential JP Morgan (JPM) According to one analyst, the "risk / return" associated with holding GE is "negative" because the 2019 rise in the stock was not based on an underlying change.

"We believe that many investors underestimate the gravity of the underlying challenges and risks at GE," Tusa wrote to its customers, "while overestimating the value of small positives."

GE shares plunged 9% to $ 9.15, making it the biggest loser in the S & P 500. The light bulb and jet engine maker is likely to have its worst day since the fall. GE was up 38% year-over-year at Friday's close.

GE's calls to Tusa are powerful because it became virtually negative on the iconic company in May 2016, when the stock was trading at $ 30. GE would end up losing three quarters of its value due to a cash crisis brought on by increasing debt and poorly programmed acquisitions. The company has even been expelled from Dow, an exclusive 30-share company.
The JPMorgan analyst put GE in the "neutral" position in December and set the course for re-launching the company. Although Tusa expressed skepticism in this research report, its upgrade helped to explode the stock.

Nightmare recession scenario

While Wall Street is betting that the GE crisis is over, Tusa recommends extreme caution. He referred to GE's "stubbornly heavy debt", GE Power's "weak" results, the need to pump GE Capital with more cash and overuse of the aeronautical division's health.

The nightmarish scenario is that the next recession comes before GE has restored its balance sheet, riddled with debt.

GE would be "vulnerable to liquidity problems in a recession," Tusa said.

GE relies on offshore wind as fossil fuel sector collapses

An economic downturn would not prolong GE's recovery plan. The resulting market turbulence would add to GE's retirement program, which is already facing a significant deficit. According to JPMorgan, a decline in the value of assets, combined with rate cuts by the US Federal Reserve, would increase GE's pension obligations by more than $ 30 billion.

GE's shares could fall "considerably less" than $ 5 if the company does not raise more funds and in the event of a recession, he said.

Other analysts have expressed confidence in GE's recovery under Larry Culp, who has moved with a sense of urgency since he became CEO last fall.

Last month, RBC analyst Deane Dray raised his GE price target to $ 13 and maintained an "outperform" rating for the stock.

"There is still a lot to do at GE, but the market can now trust the chief executive at the helm," Dray wrote in a report to his clients.

& # 39; Where is all the money? & # 39;

Although investors had a bullish reaction on GE this year, the company's management team preached cautiously.

Culp recently announced that 2019 would be another brutal year with negative free cash flow of up to $ 2 billion from its industrial operations. This would be a marked reversal from the $ 4.3 billion generated in 2018.

"GE's challenges in 2019 are complex but clear," Culp said in a statement last month. "We are tackling them as we implement our strategic priorities to improve our financial situation."

GE warns of the sad year 2019 but promises a better future

John Inch, an analyst at Gordon Haskett, predicted Monday that GE could lose about $ 2.5 billion in free cash flow in the first quarter. Anything worse than this would raise concerns about GE's financial health.

"Bond markets and rating agencies would not be happy," Inch wrote in a report.

Inch expressed dismay at GE's declining debt levels in the face of efforts to raise funds by selling long-standing companies.

"Where does all the money go?" Inch asked. "The company seems to approach the end of the trail with obvious strengths that it could sell."

GE gave "incorrect information" to EU officials

Meanwhile, GE has landed in hot water with regulators for a recent renewable energy acquisition.

The European Commission on Monday condemned a 52 million euro fine to GE for providing "wrong information" to the authorities over its takeover of LM Wind in 2017.
The regulators said that GE had initially stated that it did not develop large offshore wind turbines beyond its existing 6 megawatt wind turbine. The commission later found out from an unidentified "third party" that GE was "simultaneously" offering a 12 megawatt offshore wind turbine to potential customers. GE corrected this error a few weeks later and the regulators subsequently approved the $ 1.7 billion acquisition of LM Wind.

GE said in a statement that it was reviewing the decision of the European Commission before determining the next steps.

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