What Does General Electric Company (GE) Insurance Portfolio Review Spell Out for Potential Breakup?

Oppenheimer's Christopher Glynn notes that the review lends more weight to the idea of a breakup of GE's businesses.

General Electric Company (NYSE:GE) shares have dropped almost 8% since news broke Tuesday of a mammoth $6.2 billion after-tax charge tied to the industrial giant’s review and rising insurance reserves on its legacy long-term care policies of GE Capital’s portfolio. Before tax, the charge towers even higher at $9.5 billion, and meanwhile, another $15 billion in approximate statutory contributions between now and 2024.

Highlighting insurance review update takeaways, Oppenheimer analyst Christopher Glynn maintains his bearish stance on the company, reiterating an Underperform rating on GE stock without suggesting a price target. (To watch Glynn’s track record, click here)

Notably, the projected statutory contributions stand at $3 billion for the first quarter of this year as well as $2 billion, set out over the forthcoming seven years’ time.

“The higher estimate for statutory contribution reflects more adverse assumptions by insurance industry regulators (in this case Kansas Insurance Department) for insurers’ required capital (more adverse assumptions than GAAP). GE intends that GE Capital will fund all capital contributions with cash on hand (current $31B GEC balance sheet cash also covers about $25B expected maturities over next three years of excess debt related to prior process of liquidating GEC assets), and with earnings and dispositions,” writes Glynn.

On the heels of the GE team’s updated 2017 adjusted EPS guide to the low end of $1.05 to $1.10, the analyst scales back his expectations from $1.08 to $1.05, noting that management pointed to “continued challenging Power markets, and perhaps some corporate costs related to various portfolio processes.”

Overall, the analyst concludes with his bet on a potential breakup of the company’ businesses: “Industrial portfolio review seemed to add emphasis to potential breakup, noting various permutations under active consideration, including separately traded assets, with a guiding principle of substantial underlying strengths suppressed in the current context; idea of organic/inorganic strategic flexibility for key platforms.”

TipRanks suggests cautious analyst sentiment is predominant in Wall Street on the industrial giant, with opinion very much split between the bulls and the bears. Out of 16 analysts polled by TipRanks in the last 3 months, 3 are bullish on General Electric stock, 9 remain sidelined, while 4 are bearish on the stock. With a return potential of nearly 22%, the stock’s consensus price target of $21.15 implies that even though the analysts are largely hedging their bets, perspectives are slanted towards optimism.

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