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General Electric Company (GE) Balance Sheet Does Not Look Good for 2018, Warns Analyst

Gautam Khanna cuts his price target on GE as he shares cautious takeaways from the 10K release.


After General Electric Company (NYSE:GE) unleashed a 10K shedding light on contract assets, liabilities, and GE Power market expectations come 2019, Cowen analyst Gautam Khanna believes the verdict is not ideal.

To put it simply, the “balance sheet gets worse in C18,” writes Khanna, who reiterates a Market Perform rating on GE stock while cutting the price target from $17 to $15. This implies a 3% upside from current levels. (To watch Khanna’s track record, click here)

Just how much will the balance sheet get worse this year? The analyst spots a roughly $8 to $10 billion in rising debt for the industrial giant. The Industrial free cash flow for this year has been set close to zero, and Khanna calculates, “net of the $6B pension payment and the cash tax benefit it confers (which won’t recur in C19), and the FCF guide assumes a $2B working capital plus. Furthermore, Capital will make a $3.5B cash payment in Q1:18 for the insurance liability, $3B is owed to Alstom in September (2,464B Euros), dividends will consume $4.2B, and announced divestitures (e.g. Industrial Solutions) may only net $2B. Moreover, WMC-related exposure may require additional cash outflows (DOJ case and other lawsuits). This suggests that GE’s net debt will climb in C18 by $8-10B, assuming GE hits their guidance. For context, per the ratings agencies definition of leverage, GE Industrial’s net debt was $54.5B as of 12/31/17 (this excludes the $70B of Capital’s net debt, $44B of which GE guarantees).”

In disclosing ‘contract’ assets by segment, a new way for GE, Power comprises of 52% of last year’s $3.7 billion jump in contract assets: $1.9 billion. Meanwhile, $1.558 billion of Power’s contract asset jump can be accounted for by revenues deemed in surplus of billions on service, with $844 million, along with equipment, with $715 million. Based on the 10K, GE is angling for another dip in the Power market next year and sets intentions for restructuring initiatives at Power to reach through next year. Pricing pressure is also put the heat on the Power services market last year, and the analyst sees this lasting into next year as well.

The company also points to various challenges that faced the LEAP program, adding that these are ghosts that have largely been tackled within the supply chain, and “minor engine redesigns and field retrofits are underway.” The GE team maintains that 2016 EPS will slip by $0.13 and 2017 EPS will slip by $0.16 under the new accounting standards. “The C15-16 cash restructuring levels are higher in the 2017 10K than was the case in the 2016 10K,” Khanna surmises.

TipRanks highlights caution as the big sentiment looming over the industrial player. Wall Street is mostly on the sidelines: Out of 14 analysts polled in the last 3 months, only 1 rates a Buy on GE stock, 10 maintain a Hold, while 3 issue a Sell on the stock. However, based on these analysts’ expectations, is the stock overvalued or undervalued? Consider that the 12-month average price target of $16.30 boasts a healthy return potential of 12% from where the stock is currently trading.