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General Electric
(GE) stock is falling on Tuesday, as a potential downgrade from Moody’s Investors Service outweighed an upgrade from RBC Capital Markets.
Where we were: GE jumped on Monday following the ouster of its CEO after less than a year.
Where we’re headed: Although analysts may be more upbeat about new leadership, the change alone isn’t enough to solve the company’s financial problems, at least not yet.
It was nice while it lasted: General Electric stock got a boost when it announced that former Danaher (DHR) CEO Larry Culp would take over as CEO from John Flannery, but it’s trading lower again following a warning from Moody’s.
The ratings firm said that GE’s credit rating, currently sitting at A2, is under review for a possible downgrade. It cited GE’s warning that it likely won’t meet its 2018 earnings and cash-flow guidance due to weak results at GE Power—a segment that’s been in the spotlight following issues with its turbines. Moody’s said it is also putting GE Capital’s P-1 rating under review.
That spooked investors this morning, reversing gains GE stock had seen in early trading following an upgrade from RBC. Analyst Deane Dray boosted his rating on the shares to Outperform from Sector Perform and raised his price target by $2 to $15, citing the CEO change.
Dray writes that while there is “still much to fix,” investor confidence in Culp should “put a floor in the stock.” There aren’t any quick solutions to GE’s myriad problems, but he is heartened by the board of directors’ “decisiveness” in naming Culp CEO more quickly than expected, as “the market can now have full confidence in the senior leader at the helm.” Moreover, he writes, the covering of short positions following the news is a clear sign of “investors’ enthusiasm” for the switch.
As for Culp’s next moves, Dray hypothesizes that, as GE’s first outside CEO, he will want to assemble his own team. (Flannery was handpicked by longtime GE head Jeff Immelt, whom many blame for the company’s long fall from grace.) That may include Danaher’s long-serving Chief Financial Officer Dan Comas, as it’s “unlikely a coincidence” that he recently stepped down from his position. “We would also anticipate seeing some senior-level departures at GE as part of this management shake-up,” Dray adds.
Melius Research’s Scott Davis agrees, writing that Culp “needs to clean house, and fast,” considering all the legacy executives still at the company.
The most important change, in his opinion, is improving communication, given how poorly GE has executed on this front, including with the recent CEO news and its goodwill impairment warning. “We can’t remember a time where a CEO change did not come with a public conference call and we can’t recall a time where an impairment didn’t come with granularity,” Davis notes.
Culp’s next orders of business, he argues, include fixing GE Power and GE’s balance sheet, raising the company’s cash flow, cutting complexity, slashing corporate costs to Danaher levels, and creating “a culture of honesty.” That’s a long list, but at least it comes from a friendly source: Davis reiterated an Accumulate rating and $27 price target on GE stock.
GE is down 2% to $11.85 in morning trading. The
Industrial Select Sector SPDR
ETF (XLI) is down 0.2% to $78.96.
Make the Connection
A new CEO doesn’t mean that GE’s dividend is safe.
Bears warn that the turbine problems could keep pressuring GE stock.
Write to Teresa Rivas at [email protected]
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