General Electric Company (GE): Heads Up to Investors for “Messy Q4 on Tap”

Cowen's Gautam Khanna says GE is not a favorite stock ahead of what looks to be a fourth quarter earnings misstep.


General Electric Company (NYSE:GE) shares are floundering 4% this morning with news of capital and tax headwinds hanging heavy in the air above the industrial giant’s fourth print. With results due January 24th, investors are not taking kindly to the reveal the company is set to take an after-charge correlated with its review and reserve testing of GE Capital’s runoff insurance portfolio- a charge priced at a whopping $6.2 billion.

Additionally, GE Capital is putting a pause on its dividend to GE, at least for the time being, and CEO John Flannery finds such a monster charge “deeply disappointing.”

Cowen analyst Gautam Khanna chimes in with a cautious perspective, warning of a “messy Q4 on tap” in his earnings preview.

Ahead of the company’s financial quarterly showcase, the analyst reiterates a Market Perform rating on GE stock with a price target of $17, which implies a 5% downside from current levels. (To watch Khanna’s track record, click here)

For the fourth quarter, the analyst calls for an underclass, believing EPS will likely fall under the Street ($0.30) where capitalization apprehensions are taking over the story.

“GE’s Q4 print is apt to be below Street on an operating basis, messy on a GAAP basis, and may raise concerns about the eventual funding needs of GE Capital. Also, Q4 is unlikely to provide more conviction in C19’s FCF recovery prospects. Thus, we favor other multi-industry names (e.g. EMR) over GE,” Khanna explains, betting on $3 to $ 5 billion in insurance provision charges and net of an over $500 million tax benefit. Meanwhile, the analyst angles for asset-related losses to shift to “held for sale” status and keeps his eyes peeled to tax reform-related charges haunting GE.

Now it should not be something to “rule out” that GE Capital could be looking at an equity infusion at some point from Industrial, even though $4 billion in Capital dividends has been suspended between 2017 and 2018. The analyst notes that “Q4’s charge will erode book value (was $20B), Capital holds >$11B of Power receivables, & GE quickly divested much of Capital without much disclosure on what liabilities were retained,” adding: “Thus, it is prudent to ascribe a lower SOTP value (perhaps zero) for Capital than the $2.41/share implied by its Q3 book value. This makes a break-up of GE, which would have been non-economic even before Capital’s Q4 charge, even less so now.”

Looking at the corporate tax reform as a slight short-term “drag” on cash for the industrial giant, the analyst likewise believes the demand benefit is “unclear.”

On a final note, free cash flow recovery for 2019 is simply “not convincing,” as Khanna surmises: “It’s unclear IF and by how much C19 FCF (ex C18’s $6B pension drag) will rise vs. C18E’s.”

TipRanks underscores a cautious analyst consensus with expectations tilted toward the upside. 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 14%, the stock’s consensus target price stands at $21.91.