General Electric Company (GE) Is a Challenged Power Business: J.P. Morgan Gets Even More Bearish

Stephen Tusa trims the price target and warns that "not even a brilliant activist" can fix GE's problems.


General Electric Company (NYSE:GE) has recently been caught in a real leadership turnover, and new CEO and chairman of the board John Flannery is trying to steady the volatile industrial giant empire. One peg of the overhaul sits with GE’s chief financial officer role, which has since been filled by Jamie Miller.

Meanwhile, GE’s vice chairs Beth Comstock and John Rice are keeping the revolution wheels churning, having indicated they will be on their way out by the close of 2017. GE shares have shed a quarter in value this year, and with Steve, the head of GE’s power business, a.k.a. the company’s biggest unit marching out of the company doors, not even bulls can argue that Flannery certainly has his hands full.  Now that activist investor Trian Partners’ CEO Ed Garden has been elected to a seat on the GE Board, is this a sign of positive winds of change are fluttering at last?

J.P. Morgan analyst Stephen Tusa says no, finding it quite “negative” the more key executives depart from GE, and barely batting an eye that “appointing an activist who is stuck changes much” at all. Keep in mind that “many view any change at GE as a positive, because apparently it was really bad for the 15 years during which many sell side Bulls were saying how good it was,” Tusa cheekily remarks. In fact, Tusa would not be surprised to see a dividend cut hitting soon.

“In our view, an activist heightens the risk that GE tries for a quick fix, like it has done in the past. On this front, the historical approach from Trian has been break ups, and while investors can debate high level multiples at length, what’s absent is a rigorous discussion addressing core business trends and here not even a brilliant activist can solve utility business model issues, or make a gas turbine with more proven efficiency than competition. In the end, our SoTP continues to point to something in the high teens, with GE Capital debt loads, tax rate leakage and pension all contingencies,” underscores the analyst.

Tusa believes, “[…] the sum of the parts needs to be fully scrubbed to reflect a more appropriate multiple for a challenged power business, beyond the simple ‘Siemens +15%’ we see in rudimentary Bull case SOTP.”

With the core business ringing up terminal value,” the analyst continues to sound the alarm on the giant, reiterating an Underweight rating on GE stock while cutting the price target from $22 to $20, which represents a 13% downside from where the stock is currently trading. (To watch Tusa’s track record, click here)

Most on the Street are not ready to give up on the giant, as TipRanks analytics showcase GE as a Hold. Out of 10 analysts polled by TipRanks in the last 3 months, 4 are bullish on General Electric Company stock, 4 remain sidelined, and 2 are bearish on the stock. With a return potential of 13%, the stock’s consensus target price stands at $26.11.