General Electric (GE) has had a year to forget. The conglomerate and once sure-fire investment is down nearly 60% since the beginning of the year, as investors have fled the company in droves. From poor financials and continuous downward revisions to expectations, to a severe cut in its dividend, the company is not what it used to be. This week, however, investors got some good news in the form of an analyst upgrade.
JP Morgan analyst Stephen Tusa has upgraded GE’s stock to Neutral from Underperform, though maintains a price target of $6.00, about 17% lower than its current trading price. (To watch Tusa’s track record, click here)
Tusa commented, “Upgrading GE to Neutral and removing it from the Analyst Focus List as a short idea as we now see a more event-driven, balanced risk reward at current levels.” The analyst says that “the outcome of the “known unknowns” in near term…are better understood, ” and that the “negative outcome on (GE’s) liabilities is at least partially discounted” opening up the possibility that GE can “can execute its way through an elongated workout that limits near-term downside.”
Tusa presents a “simplified ‘workout’ scenario,” where “management raises ~$25B of equity as part of the solution to the leverage (liability issues), which we assume goes to fund the pension plan, while also contributing incrementally to other liabilities like insurance.”
The analyst believes that “with FCF at $0.30, selling equity at current levels is actually more attractive financially, as the company is explicitly selling a piece of the portfolio (Power/Renewables) that is cash flow negative.” He continues, saying “an equity raise is important, in our view, as it would help to blunt the chief risk we see in a downturn, namely the balance sheet.”
GE has a cautiously optimistic Moderate Buy consensus rating from the Street. This breaks down into 7 Buy, 9 Hold and 1 Sell ratings in the last three months. We can also see from TipRanks that the average analyst price target is $11.57, which represents about 61% upside from current levels. (See GE’s price targets and analyst ratings on TipRanks)