General Electric Company: A “Show Me” Story with Reasons to Be Cautious

On the heels of GE's 4Q print, Cowen's Gautam Khanna shares his two cents on the industrial giant from the sidelines.

General Electric Company (NYSE:GE) CEO John Flannery recognizes his industrial giant is in need of some recovery, calling the new year a “reset year” prioritizing three main segments: power, aviation, and healthcare equipment. Is a breakup forthcoming for GE’s operations to beef up return potential?

Following yesterday morning’s fourth quarter earnings release, Cowen analyst Gautam Khanna cannot help continuing to recognize GE stock as a “show me” story, one “apt to oscillate around $17/share (3% dividend yield), unless GE breaks up, which we believe would send the stock down towards its SOTP value.”

As such, the analyst reiterates a Market Perform rating on GE stock with a price target of $17, which implies a close to 3% upside from current levels. (To watch Khanna’s track record, click here)

Is a “power rebound […] likely anytime soon?” Khanna says no, saying that “hopefully” EBITDA headwinds will prove to be “nonrecurring”, considering the fourth quarter saw GE’s Power segment incur $1.3 billion in these year-over-year headwinds. Khanna notes this “broadly can be categorized as ‘execution’ ($450MM from project cost overruns) and ‘1x items’ ($850MM in aggregate, with a $360MM inventory write-off the largest single item),” adding: “Power President Russell Stokes indicates that Power is enacting stringent filters on what projects to undertake and on what terms, and many senior positions have turned over (most recently, Joe Mastrangelo, head of Gas Power systems).”

The segment’s EBIT is all the same anticipated to circle $1.2 to $2.2 billion this year even facing a close to $1.2 benefit from a boost in “contract assets.”

Meanwhile, “potential charges still lurk,” the analyst warns, underscoring an SEC investigation of the company’s contract asset accounting coupled with an “internal review of the fidelity of these balances is in the early days but has yet to uncover any obvious mistakes.”

The first quarter of 2018 is primed to be a “very soft” one for the industrial giant, with the analyst’s preliminary first quarter adjusted EPS estimate set at $0.08, not including $800 million in pension and $750 million of restructuring costs. In order of segment, Khanna breaks down what he believes GE’s biggest year-over-year profit “decliners” will prove to be: Power and Transportation. Additionally, the analyst pinpoints free cash flow for the first quarter as probable to be negative, with Khanna estimating -$500 to -$700 million considering a bad triple thread of $800 million worth in fourth quarter “pull forwards, lower advances (weak OE demand), and seasonality.”

Lastly, “a break-up wouldn’t be accretive to stock price,” contends the analyst, taking under account “dis-synergies and other liabilities that need to be ascribed to assets in the event of break-up.”

TipRanks points to a cautious Wall Street majority opinion on the industrial giant’s opportunity in the market. Out of 14 analysts polled in the last 3 months, just 1 is bullish on GE stock, 10 are sidelined, while 3 are bearish on the stock. With a return potential of 7%, the stock’s consensus target price of $17.60 suggests some optimism wedged in these analysts’ expectations, even if opinion points to playing it safe on General Electric.

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