No Blue Sky In Sight: Analyst Steps To The Sidelines On General Electric

General Electric Company GE cautioned investors last week it needs to take a $6.2 billion after-tax charge for its insurance business in the fourth quarter and is now required to contribute $15 billion to the unit over the next seven years to boost its reserves.

The bad news continued Monday as a notable Wall Street analyst revised his valuation model and found GE Capital's value to equity holders as "essentially zero."

The Analyst

Bank of America's Andrew Obin downgraded General Electric's stock from Buy to Neutral with a price objective slashed from $22 to $17.

The Thesis

GE's disclosure last week included a $9.6 billion charge related to its Long-Term Care liabilities that came in ahead of the company's November 2017 guidance of $3 billion, Obin said in a note. The variance in the charge versus expectations, coupled with limited disclosure related to any off-balance sheet liabilities "once again raise a question about the credibility" of the company's current guidance and capital structure. The company is now expected to revise its 2018 outlook to the downside when the company reports its fourth quarter results Wednesday.

Meanwhile, the analyst's new sum-of-the-parts valuation of GE's business yields a value of "essentially zero" for GE Capital, although any concerns about GE Capital's structure are "overblown." The company could also "plug a hole" if future problems arise through issuance of preferred shares at an attractive coupon to a strategic investors.

GE isn't expected to provide any new major announcements until the company's new board of directors is put in place in late April. Investors could expect a major strategic update in May when the company presents at the Electrical Products Group conference.

Price Action

Shares of GE hit a new multi-year low of $15.80 Monday morning.

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