General Electric Analyst Downplays SEC Threat, Shareholder Lawsuits A 'Concern'

General Electric Company GE shares dropped 3.9% on Tuesday after the company disclosed it received a “Wells notice” from the Securities and Exchange Commission notifying the company the SEC is considering civil action against GE.

On Wednesday, one analyst said the Wells notice may not be as bad for the company as it appears at first glance.

The GE Analyst: Bank of America analyst Andrew Obin reiterated his Buy rating and $11 price target for GE.

The GE Thesis: Obin said the SEC appears to be focused on GE’s insurance business, which the company internally reviewed back in 2017. GE issued a $9.5 billion pre-tax charge, and its insurance regulator, the Kansas Insurance Department, signed off on GE’s plan to boost its insurance subsidiaries’ capital levels by $14.5 billion.

“While a negative headline, we view GE as already having taken action here,” Obin wrote in a note.

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Obin said GE could still face a potential SEC penalty from the investigation, but recent civil fines have been minimal. Over the last five years, Obin said the top 5% of SEC civil penalties have averaged $71 million, an amount that would be relatively easy for GE to manage.

A potentially bigger risk could be if the SEC lawsuit triggers follow-up lawsuits by GE investors. GE shares are now down 44.1% in 2020 and 76.2% overall in the past five years. Obin said the potential for shareholder lawsuits would likely be much higher if an SEC settlement forces the company to admit wrongdoing.

Benzinga’s Take: It seems GE’s financial situation is far better than it has been in recent years, and the company’s balance sheet is stable and flexible enough to endure yet another difficult year. However, GE investors are likely growing tired of hearing about how a turnaround is just around the corner after years of underperformance and lackluster cash flow and earnings numbers, and the SEC notification is a reminder that they haven’t yet escaped the ghost of GE’s past.

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