JPMorgan Downgrades GE, Says Wall Street 'Significantly Over Projecting' Cash Flow

After a horrible couple of years for General Electric Company GE investors, the stock bounced back significantly in the first quarter of 2019. Unfortunately, one Wall Street analyst said Monday the stock’s year-to-date gains are pricing in too much optimism for GE.

The Analyst

JPMorgan analyst Stephen Tusa downgraded GE from Neutral to Underperform and lowered his price target from $6 to $5.

The Thesis

GE’s cash flow potential has plummeted, yet Tusa says many Wall Street analysts are maintaining their price targets for the stock.

“The driver of the downgrade is our view that the Street is significantly over projecting the bounce in FCF in the coming years, off levels that we calculate at zero currently, as Power/Renewables remains weak, GECS will likely consume material cash for the foreseeable future, Aviation fundamentals, as per underlying FCF, are weaker than meet the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession, for which a potentially dilutive sale of the rest of Healthcare may be needed,” Tusa wrote in a note.

His $5 price target is based on applying an industrial sector valuation multiple on JPMorgan’s 2021 free cash flow projection for GE. Tusa says GE’s challenges are much better understood than they were a year ago, but the stock’s 2019 rally has pushed the risk-reward balance in favor of the bears.

Price Action

GE traded lower by 4.7 to $9.54 per share percent on Monday following the downgrade.

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