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General Electric (GE) shares erased their gains on Tuesday after Moody's Investors Service revised its A2 credit rating for a possible downgrade just one day after equities surpassed the S & P 500, in a renewed optimism for new CEO Larry Culp.
"Among the issues being examined by Moody's, there is the impact of the ongoing deterioration of its Energy business on GE's earnings and cash flow outlook, which is expected to persist for a period of time," he said. Moody & # 39; s. "GE Power's weaker outlook is becoming increasingly important given the loss of free cash flow following GE's planned divestitures, including GE Generation and GE Healthcare."
"The review will also assess other measures likely to improve GE's free cash flow relative to the balance of its debt," added Moody's. "These could include measures to reduce the very substantial pension deficit, GE's $ 4.2 billion annual dividend, improved working capital or the efficiency of investments." Potential for disruption or acceleration of efficiency programs already underway with another change in management will be assessed. "
GE shares fell 1.78% after the publication of Moody's and changed hands at $ 11.88 each, bringing the decline to about 32% since the beginning of the year and values the New York-based conglomerate at around $ 105 billion.
Earlier Tuesday, RBC Capital upgraded its stock price to "outperform" with a target price of $ 15 per share, following the announcement that Culp would replace outgoing CEO John Flannery after just one year of work.
The announcement of the bomb, which included a warning that the weakness of its GE Power business would make it run out of 2018 target for free cash flow and profits, while the troubled division was receiving a goodwill of $ 23 billion, made the stock jump, but also raised serious questions about fate. long-term dividend of the group.
"We are modernizing GE, from Sector Perform, to surpass the announcement of the appointment of Larry Culp to the position of President and CEO," said the RBC analyst, Deane Dray. "There is still a lot of work to be done, and it will take time to get your team together, fix the problems and fix the problem, and put your footprint on the breaking plan." But we think that a floor has been put in square."
Other analysts have weighed on the company's dividend prospects, UBS's Steven Winoker claiming that "the language [of] write all the power vesting gaps and recognize both the money and [earnings per share] Deficiencies pave the way for the redesign of society, dividend policy and the deployment of capital. "
Barclays wrote Monday that "given the shortfall and the $ 4.2 billion dividend this year, the dividend [free cash flow] This ratio will probably be above 80% in 2018. "
Last week, RBC's Dray said the bearish investment thesis for GE had gained momentum after the revelation of problems with the gas turbine fan blades, which are coming on board. to the "already full set of negatives that are looming on the horizon", including a likely reduction in forecasts for 2018, ongoing investigations with the SEC and the DoJ. potential dividend reduction and cost and price pressures exacerbated by US-Chinese tariffs and spillovers from the trade war ".
"Given the punitive response to the problem of fan blades, it seems that new bad news continues to drive down stocks," wrote Dray in a research note published Sept. 27 when stocks were trading around 11 , $ 50 each.
Culp takes the reins of GE after joining the board in April, after 13 years at the helm of Danaher Corp. Culp, 55, replaces Flannery, who succeeded Jeff Immelt in August 2017, trying to revamp the group, which included the split of its health division and the sale of its stake in oil services group Baker Hughes ( BHGE).
GE stated that these plans, which follow its ongoing strategic review, will mark a shift in direction to its energy, aviation and renewable energy businesses and will create "a higher technology industrial society simpler, stronger and more efficient". Flannery said the move "ended" with restructuring ambitions that would "empower" the group in the future.
However, GE's shares lost more than half of their value under Flannery's brief term. Recent pressures on the fate of its Power division have increased, while the launch of a major gas turbine reactor would negatively impact the group's earnings.
The board had apparently been frustrated by the slow pace of change under Flannery's leadership, which led to his departure, CNBC reported, citing sources close to the subject.
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