For many, the comeback of General Electric (GE) isn’t only on its balance sheet, but with management. CEO Larry Culp has made transparency and re-gaining the trust of investors a priority, and the company has taken steps to put this into practice, including the hire of a new investor relations chief and the reorganization of its board. But the company recently had a significant error, after its original reporting of gas turbines orders turned out to be way, way less. Not only does this contribute to financial expectation, but it puts a dark cloud over its reputation.
In light of recent development, J.P. Morgan analyst Stephen Tusa maintained his Underweight rating on GE stock with a $5.00 price target, which implies nearly 50% downside from current levels. (To watch Tusa’s track record, click here)
GE “generated a buzz” last month after announcing it had 4.5 gigawatts (GWs) in gas turbine orders, but this turned out not to be a bust. Tusa believes that the announced 4.5 GWs on 11 [heavy-duty gas turbines, HDGT] orders is “disconnected,” as the “average rating/turbine [would be] at an unreasonably high 400 MWs+…” Instead, the analyst sees about 1 GW “of real tangible externally sold HDGT orders.”
This is important for a number of reasons, including showing that GE continues to lose market share. Tusa says, “ongoing market share loss head to head reinforces our view that GE’s technology is not as competitive as in the past, and means that going forward revenues will lag what many expect to be a flat market…”
Tusa also believes GE’s communication regarding the numbers was something that should irk Wall Street, as the company disclosed “orders as defined by McCoy in MWs,” rather than units, how it is normally published as. The analyst says, “from a sentiment/investor confidence perspective, we believe this style of communication has an even more negative implication,” as the company continues to try to regain trust. So while this may have been an excusable mistake for some companies, because investors are looking at GE under the microscope, a small cut could have an outsized impact on sentiment going forward.
All in all, GE stock is up nearly 36% year-to-date as the company continues to work on restructuring and bringing back focus to its core products. But it is still walking on thin ice, as investors are judging the company just as much for its management as its performance. GE has drawn optimism mixed with caution when it comes to consensus opinion among sell-side analysts. Out of 16 analysts polled in the last 3 months, 7 are bullish on GE, 7 remain sidelined, while 2 are bearish on the stock. With a return potential of 13%, the stock’s consensus target price stands at $11.18. (See GE’s price targets and analyst ratings on TipRanks)