Is General Electric (GE) Stock a ‘Sell’ After Fitch’s Downgrade?


General Electric’s (GE) stock has had some sort of resurgence in 2019. While the company lost significant value in 2018 (at one point down more than 60%), shares have risen as high as 30% so far in 2019. The company continues its restructuring efforts and many analysts have praised new CEO Larry Culp for accelerating plans to spin off non-core assets, which has contributed to a increased optimism for the future and a higher stock price. As the company sells off secondary businesses, it will be able to return focus to its core revenue-generating operations, while also making it a bit easier to improve its financial health (which has been in relative disarray because of its Capital unit).

But the company got a piece of bad news earlier this month as Fitch downgraded its outlook on GE to Negative, from Stable. In reaction, finance expert Shock Exchange (SE) recommends investors to Sell the stock.

SE doesn’t see Fitch lowering its credit rating on the company to junk-bond levels, saying, “I find it difficult to believe the rating agencies will actually sack GE. If they were being fair, then they would have done so already. However, (through the outlook revision) Fitch may have put the industrial giant on notice.” Fitch maintains GE’s status as BBB+ long-term and F2 on short-term (both “good” but not the highest rating possible).

While GE has been able to win investors over the past few months, SE says “GE’s Q4 financial results were nothing short of disastrous.” He points to flat “revenue from core GE (NewCo) – Aviation, Power Systems and Renewable Energy”, which “over 35% of NewCo’s revenue was derived from Power Systems, which remained a laggard (and) fell 25%.” Power is especially important because Moody’s downgraded GE in October as a reflection of the ‘adverse impact on GE’s cash flows from the deteriorating performance of Power,’ which “is still a drag on GE’s earnings and cash flows.”

SE says, “Power’s demise will likely continue. The power generation businesses of Siemens are reflected in Power and Gas and Energy Management. In Siemens’ most recent quarter, the combined revenue and EBITA from these two segments fell Y/Y by 5% and 48%, respectively. According to Siemens’ earnings release, Power’s demise will likely continue as global energy trends structurally reduce overall demand for the unit’s offerings, resulting in declining sales of large turbines and corresponding pricing pressure. These headwinds will likely impact GE going forward.” While the SA says it is “difficult to believe the rating agencies could finally junk GE…they may have no other choice.”

Though General Electric had a rough 2018 and recently received some bad news from Fitch, the Wall Street community is still optimistic on its future. According to TipRanks analysis of 15 analyst ratings, there is a consensus Moderate Buy rating on the stock, with eight analysts Buying, six Holding and one Selling. The average price target stands at $10.70, representing a 7% upside. (Click here to see GE’s price targets on TipRanks)