Can General Electric (GE) Shake Off the SEC Investigation Overhang? RBC Capital Cuts Price Target

RBC Capital's Deane Dray says any positive of GE's fourth quarter print no longer hold weight amid the "unsettling" news of two SEC investigations amiss.


If General Electric Company (NYSE:GE) may have gained some momentum from maintained expectations for 2018, as far as RBC Capital analyst Deane Dray is concerned, it has officially been put on hold in the wake of the SEC investigation.

As such, the analyst reiterates a Sector Perform rating on GE stock while cutting the price target from $20 to $17, which implies a 27% upside from current levels. (To watch Dray’s track record, click here)

“The initial 4Q17 celebration triggered by Sector Perform-rated GE’s reaffirmed 2018 guidance was unexpectedly blindsided by the unsettling disclosure on the conference call of two SEC investigations focusing on the Jan-16 insurance reserve and GE’s contract asset accounting practices. While it is uncertain how these investigations will play out, this development adds a negative overhang that is likely to keep many investors on the sidelines for now,” explains Dray.

Could the situation for GE investors have gotten more underwhelming after the industrial giant already negatively preannounced last week with numbers swimming at the bottom-end of the company’s 2017 guide? Apparently so, as the company’s fourth quarter print “still disappointed,” revealing a 6% drop in organic revenue, EPS that underclassed the Street by 2 cents, and an 88% plunge in Power income. The saving grace here for GE boiled down to its 2018 EPS guide of $1.00 to $1.07.

“Our take is that GE was intent on communicating that its 2018 outlook was unchanged despite these 2017 shortfalls,” the analyst writes, who now angles for the Industrial operating profit to outperform the prior guide of 2% to 7%. Industrial CFOA was another strength of GE’s fourth quarter earnings show, trouncing expectations by $2.7 billion and delivering a “record” backlog hitting $341 billion. Yet, any positive in the print was “quickly made irrelevant,” Dray asserts in the aftermath of not one, but two SEC investigation announcements. Not only is Dray reducing his 12-month target expectations for GE stock, but he is likewise scaling back his 2019 EPS forecast by 4 cents.

Bottom line, the analyst concludes on a note of wariness for GE’s short-term prospects: “While it is difficult to handicap the risks associated with these SEC reviews in their early stages, this overhang will likely continue to dog GE over the near-term and present any bottom-fishing investors with a reason to stay on the sidelines.”

TipRanks shows a largely neutral Wall Street surveying GE shares with a cautious consensus perspective. Based on 13 analysts polled in the last 3 months, only 2 analysts rate a Buy on the industrial giant, with a majority of 8 maintaining a Hold and 3 issuing a Sell. Worthy of note, however, the 12-month average price target stands at $14.78, marking an encouraging upside potential of 10% from where the stock is currently trading.