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General Electric (GE): EPG Conference Puts Bearish Risk Factor in the Spotlight, Says J.P. Morgan

J.P. Morgan's Stephen Tusa sees GE Capital as an understimated risk, with the numbers pointing to another capital raise around the corner.


General Electric (NYSE:GE) Capital continues to pose a risk Wall Street is underappreciating, warns J.P. Morgan analyst Stephen Tusa, putting investors on guard on back of the 2018 Electrical Products Group (EPG) Conference. Tusa’s verdict from the latest disclosure: further capital may be required for GE to “de-risk.”

Ironically, during the EPG presentation, Tusa notes the GE management team repeated the phrase “de-risk” a whopping 15 times, which includes focus on de-risking GE Capital. On a cheeky note, the analyst cannot help musing, if this segment were presently such a “non-issue,” why all the urgency to de-risk?

Therefore, the analyst reiterates an Underweight rating on GE stock with an $11 price target, which implies a just under 22% downside from current levels. (To watch Tusa’s track record, click here)

“We believe GE Capital remains an underappreciated risk, and if the aim is to ‘de-risk’, which was the new language from EPG, the math suggests more capital may be needed, even without another charge from lingering liabilities. While many are discounting January’s Insurance charge as one of the last ‘shoes to drop’ at GE, we view it as more of a wake-up call around a GECS book that continues to operate with the burden of a systemic approach to making short-term earnings look better with ultimately uneconomic long-term moves,” writes Tusa.

Glancing at the company’s income statement and even taking under account a meaningful scale-back in debt, the analyst nonetheless still says GE lacks the portfolio yield, or revenue needed to “cover” fixed expenses- particularly considering the suggested interest rate on debt has jumped over the course of the last year. In other words, “equity cannot build organically,” the analyst advises, crunching the numbers to find that the close of the first quarter points to a need for roughly $38 billion in debt reduction.

Moreover, the analyst runs figures that reveal $13 billion from core asset reduction, $17 billion from cash draw, which is leveraged by around $4 billion pouring into the insurance segment. That said, the analyst spots a need for a further around $11 billion in asset sales, or roughly $2.5 billion of a capital contribution to reach 4x.

Tusa highlights, “In case the math is confusing, in total, to get to ratings agencies’ targets we see either ~$22 B in incremental asset wind down versus standing plan, or a ~$3 B capital contribution.” However, this does not factor any rising pressures from WMC, trailing liabilities, or future insurance adjustments, in which each $1 billion in extra charge translates to around $4 billion in rising asset “wind down” or corresponding degree of equity to capital infusion to sustain these metrics. Additionally, this also fails to factor the fact GE utilizes $6 billion in cash from GECS to fuel its “already” revealed pension contribution, which the analyst believes “looks like a challenge now.”

Overall, Tusa wagers that “as the Board continues to work through what we think needs to be more of a ‘global solution’ to de-risk over the next month, we believe GECS is a factor that is not gone and should not be forgotten.”

TipRanks indicates apprehension rules the Street on GE stock, but with some optimism baked into expectations. Out of 12 analysts polled in the last 3 months, Wall Street appears evenly split between the bulls, the bears, and the sidelined: 3 are bullish on GE stock, 6 remain sidelined, while 3 are bearish on the stock. With a return potential of nearly 9%, the stock’s consensus target price stands at $15.31.