General Electric Company (GE) Capital Charge Is Problematic on Many Levels

Cowen's Gautam Khanna pinpoints "at least" three big concerns arising from General Electric's divested insurance portfolio review massive after-tax charge.


General Electric Company (NYSE:GE) has a shadow hanging over it today following the reveal of tremendous $6.2 billion after-tax charge, towering at $9.5 billion pretax. Even CEO John Flannery deems this tremendous charge frustrating, particularly for an insurance portfolio the company divested more than a decade prior. In reaction, shares took a 4% hit in trading today.

Cowen analyst Gautam Khanna casts his two cents rooted on the sidelines, fearing that the giant’s capital charge is “problematic on many levels.” In fact, Khanna is so concerned he is out with his second report in two days on the matter.

Consider that this charge shoots well past initial expectations, as the analyst underscores: “The $6.2B is 2x+ larger than GE had originally guided, and $2B higher than we were expecting.”

On the heels of these new “woes,” the analyst reiterates a Market Perform rating on GE stock with a price target of $17, which implies a close to 7% downside from current levels. (To watch Khanna’s track record, click here)

“Capital’s $15B of cash payments through 2024 related to a divested insurance portfolio raises concerns about eventual Industrial cash infusions to Capital, and reinforces our view that the SOTP value of GE is below the current stock price,” Khanna asserts, believing the after-tax charge poses at the minimum three pressing concerns for the company.

The analyst cannot help wondering: just “what else don’t we know about Capital’s liabilities?” Moreover, the analyst wonders exactly “what liabilities Capital has retained from recently divested assets that could become cash drains in the future.” Worthy of note, in the latest years, Capital has sold past $100 billion of assets and has offered “limited disclosure” regarding liabilities retained.

Meanwhile, regarding cash infusions that may be necessary down the line, Khanna explains, “the $15B of anticipated cash payments essentially eliminate Capital’s FCF for the foreseeable future, leaving little capacity for other challenges that may develop.” Already, the industrial giant is poised to bring “very little” free cash flow to the table this year, and the company’s balance sheet is only bound to “get worse” by the end of the year due to cash calls.

Lastly, a “break up would be non-economic,” Khanna argues, contending, “As we have discussed before, GE’s sum-of-the-parts valuation is below the current stock price […] and that was true before Capital’s announcement today. Thus, we see no quick fix for the stock.”

TipRanks indicates an apprehensive Wall Street surveying this industrial player with analyst expectations slanted to the bulls. Out of 15 analysts polled in the last 3 months, 3 are bullish on General Electric stock, 8 remain sidelined, while 4 are bearish on the stock. With a return potential of nearly 20%, the stock’s consensus target price stands at $21.91.