General Electric Company: Two SEC Investigations Set to Keep Investors Sidelined; RBC Cuts Price Target

RBC Capital's Deane Dray is cutting his 12-month price target on GE, fearing disclosure of investigations hover as a "negative overhang" for the stock.


General Electric Company (NYSE:GE) investors are left waving away any parade followed by a fourth quarter print that saw the industrial giant maintain its 2018 guide. The culprit? Not one, but two SEC investigations putting the company’s insurance reserve and contract asset accounting practices under the spotlight.

RBC Capital analyst Deane Dray calls this an “unsettling disclosure” that “unexpected blindsided” the company’s reaffirmed guidance. With a fourth quarter print that saw various “shortfalls,” including a 6% organic revenue dip, an EPS miss of $0.02, and Power income that fell by 88%, the one saving grace had been the guide reiterated between $1.00 and $1.07.

“Any momentum” has now been “stalled,” writes the analyst, who maintains a Sector Perform rating on GE stock while reducing the price target from $20 to $17, which implies a 5% upside from current levels. (To watch Dray’s track record, click here)

Dray offers a note of caution after scaling back expectations, likewise cutting his EPS forecast for 2019 by $0.04: “While it is uncertain how these investigations will play out, this development adds a negative overhang that is likely to keep many investors on the sidelines for now.”

“Our take is that GE was intent on communicating that its 2018 outlook was unchanged despite these 2017 shortfalls. The way the math works, the implicit Y/Y growth in Industrial operating profit should now exceed the prior guidance of 2%-7%, though GE likely did not want to provide a new explicit target at this time. Other positives included Industrial CFOA beating expectations by $2.7 bil and a record backlog of $341 bil. However, these were quickly made irrelevant when management unexpectedly disclosed during the earnings call that the SEC had opened two separate investigations: one into GE’s insurance reserve charge and the other into its contract asset accounting practices. The stock reaction to this negative news was swift, reversing a +4% relief rally into a 2%-3% decline,” underscores the analyst.

Dray acknowledges it “difficult to handicap the risks associated with these SEC reviews in their early stages,” but surmises that the pressure will haunt the industrial giant in its short term- all while giving “any bottom-fishing investors with a reason to stay on the sidelines.”

TipRanks signals cautious on this industrial stock when it comes to the Street’s majority perspective. Based on 14 analysts polled in the last 3 months, 1 is bullish on General Electric stock, but 10 play it safe on the sidelines, with 3 bears running for the hills. However, is some optimism baked into these expectations? Consider that the 12-month average price target of $17.60 suggests almost 9% in upside potential from where the stock is currently trading.

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