General Electric will be burning cash for years, JPMorgan says (GE)

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General Electric CEO Lawrence Culp said Tuesday that he sees the company having negative industrial free cash flow this year as a result of its underperforming power unit.
The company’s cash burn will stretch into 2021, according to JPMorgan analyst Stephen Tusa, a long-term GE bear.
Tusa says GE can tumble to zero if its negative free cash flow is fully priced in.
Watch GE trade live.

General Electric‘s cash burn will last for years, JPMorgan says.

CEO Larry Culp said Tuesday that its industrial free cash flow will be in "negative territory" this year as its power unit has been slow to adjust cost structure during its slump. "This is a multiyear turnaround" in the power unit, he said.

While Culp sounded the alarm on the company’s cash flow and its power unit, the majority of Wall Street analysts are still bullish on the company. The stock has 10 buys, 10 holds, and two sells as of Wednesday.

"Much Buy-rated sell side analysis still seems to us to be built on a notion that things can V-shape hard in 2020/2021 off of a high base of FCF – contrary to what the CEO said," JPMorgan analyst Stephen Tusa, a long-term GE bear, said in a note out on Tuesday.

"We disagree with the view that it’s ‘not that bad’, and while ‘cutting numbers, reiterating Buy’ is fairly common for the sell side, we reject this approach of cut and push to the next year, which has been going on for almost two decades now for some. Unlike prior episodes that were based on next year, this seems to stretch into 2021, a whole new level."

He added: "The answer to us is somewhere in between where the stock is today and zero and that is where generally our PT sit."

Tusa held his price target of $6 — 36% below where shares are trading, and said his price target "looks generous" after Culp’s comment on Tuesday.

GE shares were under pressure in 2018, losing more than half of their value as its power business struggled, price-cost pressures were compounded by the US-China trade war, and its LEAP engine suffered through behind-schedule deliveries.

To reorganize its business, General Electric announced a massive restructuring in June, saying it would reduce its debt by $25 billion in an effort to shore up its balance sheet. In October, GE replaced CEO John Flannery with Larry Culp. Under the leadership of Culp, GE has been speeding up efforts to reduce debt and raise cash by selling assets.

In November, GE announced it would expedite efforts to sell a $4 billion stake in the oil-field-services provider Baker Hughes. Additionally, its finance arm, GE Capital, sold a $1.5 billion healthcare-equipment finance portfolio to the US lender TIAA Bank.

And in December, General Electric said its digital unit would sell a majority stake in ServiceMax, a software provider, to the technology-focused private-equity firm Silver Lake.

Entering January, GE announced that it had revised the merger agreement between the rail-transport company Wabtec and its business unit GE Transportation. Under the new agreement, GE will receive $2.9 billion of cash but give more equity to Wabtec.

Separately, GE Capital sold off $8 billion of assets in the fourth quarter and brought its debt load down by $21 billion, according to the company’s earnings release. But Tusa questions if the company’s actions to reduce liabilities works effectively.

"We have argued at length that either the assets are not worth what they are on the GE Capital Service balance sheet or that unwinding them would be a headwind to GE Industrial FCF that would need to be funded," he said.

General Electric was up 21% so far this year.

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