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JPMorgan Just Came Out Negative On General Electric: Risks Don't Support Premium

General Electric Company NYSE:GE - JPMorgan Just Came Out Negative On General Electric: Risks Don't Support Premium

General Electric Company GE shares outperformed the group by ~3,000bps. JPMorgan’s C. Stephen Tusa, Jr resumed coverage of the company with an Underweight rating and a price target of $27. The analyst commented that General Electric’s ongoing FCF weakness and fundamental risks do not support a premium valuation.

General Electric has achieved a “bold portfolio transformation” and has solid technology potential. Analyst Stephen Tusa pointed out, however, that these positives were already more than reflected in the company’s shares. He added that the risk/reward appeared unfavorable, in view of “a stubbornly high expectation forward earnings curve,” combined with soft underlying earnings quality and FCF.

Too Much Risk To Deserve A Premium

Tusa believes that General Electric may not be able to meet its 2018 EPS target of $2 due to mixed fundamentals, which have already resulted in a steep decline in the 2016 base and calls for two years of 10 percent profit growth following 1 percent growth in 2015 and 2016.

The analyst projected General Electric’s 2018 FCF at $1.35 per share, compared to the consensus expectation of $2. He said that current conversion on total EPS, at 75 percent, was low; and while the core conversion may improve going ahead, the change may be insufficient to make much of a difference.

Tusa said that any improvement in the core would be limited by “cash poor ALO accretion (we estimate 50% by ’18 or ~$0.08 of cash), structural business model dynamics like a stretched supply chain, competitive terms (aero-derivatives are book and ship, H-Frame lead times <12 months), and program accounting related adjustments in earnings (+$1.4 B in ’15), all stock specific issues.”

DateFirmActionFromTo
May 2016JP MorganInitiates Coverage onUnderweight
Apr 2016BernsteinDowngradesOutperformMarket Perform
Jan 2016CitigroupInitiates Coverage onBuy

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