5 Reasons Why You Should Dump General Electric Company Now
After a very poor 2017, General Electric Company (NYSE:GE) stock is down again, this time at $16.26- a record 6-year-low and just half of 2016 share prices. Why? Well GE shocked even the most bearish analysts with the news of a $6.2 billion after-tax charge for its insurance portfolio from GE Capital- its financial services unit. GE will also add $15 billion over seven years to firm up the unit’s cash reserves- which means ensuring that each of the 300,000 insurance policies has a $50,000 cover. GE has stated that GE Capital will fund all capital contributions with cash on hand.
Investors with a big appetite for risk may be thinking that now is the time to invest while prices are so low- but I would caution against such a dangerous move. Here are five reasons why:
- Tax hit – The after-tax charge I mention above refers to a portfolio that GE divested over 10 years ago. The fact that GE could now incur such a massive hit raises concerns of a similar cash drain incurring with other more recently-divested assets. Note that GE Capital has sold over $100B of assets over the last few years- with limited disclosure on the potential liabilities for each of these divestures.
- Break up isn’t a solution – Speculation over a breakup of this huge conglomerate is rife. Some commentators are arguing that even if a breakup caused a short-term price hit, in the long run a breakup could actually be beneficial to shareholders. The other option is an asset sale of a sale of a complete business unit. Both these options create a great deal of uncertainty for GE stock.
- Valuation – Most worryingly, a sum-of-the-parts analysis by top Cowen & Co analyst Gautam Khanna reveals that the valuation on a sum-of-the-parts basis actually works out below the current share price. Khanna calculates that this valuation would result in a share price of $11-$15 for GE. As a result, there is no magic wand ‘quick fix’ for General Electric right now. It is also possible that a break-up could cause significant risks to GE’s credit ratings (already on negative watch), which would also be a bitter pill for shareholders to swallow. The tax bill would also be huge, and the company would also have to deal with its underfunded-pension and GE Capital’s net debt of over $70 billion.
- Dividend cut – The company’s severe financial position and limited free cash flow means that another severe dividend cut is likely. GE already slashed dividends in half in November. At the same time, we can also expect sizeable cuts to digital spending and other discretionary areas of spending such as R&D. This could compromise the company’s product innovation and its growth going forward. As a result, the company could need to raise further equity capital – and it may want to do this sooner rather than later in case share prices continue to fall.
- General Electric’s Power segment – Continuing challenges in the company’s core Power market. New CEO Jeff Immelt has also just announced that the company will report 2017 EPS, ex-insurance charges, at the low end of its $1.05 to $1.10 guidance range. Wall Street had been expecting EPS to come in at $1.07- but now this figure seems very unlikely. The company has been struggling with poor performance in its core business for a while- and the prospect of a turnaround now seems very distant. Indeed, Khanna suggests that Power remains in the early innings of an extended downturn. He blames this on enduring pressures in the gas turbine market.
Overall, we can see from TipRanks that the stock has a very hesitant outlook from the Street. In the last three months, GE has received only 2 buy ratings vs 8 hold ratings and even 4 sell ratings. As share prices continue to sink, the average analyst price target now stands at 20% upside from the current share price. Meanwhile top Deutsche Bank John G Inch sees the stock falling back to $15 (8% downside from the current share price). He reiterated his Sell rating on GE on January 19. Inch warns that increasing debt and debt rating downgrades will mean that GE will find it increasingly expensive to borrow the funds it needs.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.