General Electric Analyst Questions the ‘Quality’ of Earnings

(Bloomberg) -- Investors should keep a watchful eye on General Electric Co.’s earnings quality, a sellside critic from Gordon Haskett wrote in a note to clients in which he also cut his GE earnings estimates and price target.

“Instead of moving GE toward a GAAP earnings presentation or more conservative accounting, former CEO John Flannery instead shifted the presentation of GE’s earnings toward an even more aggressive framework by excluding massive (recurring) restructuring charges,” analyst John Inch warned in a note to clients.

Those restructuring charges were “significantly” over $3 billion a year, Inch said, and he doubts the manufacturing giant will slow the pace of cuts given Flannery’s termination was tied to his not moving fast enough. Investors should get an idea of GE’s new head Larry Culp’s direction when the company reports fourth quarter earnings on January 31.

General Electric will likely have sold off Baker Hughes and its rail operations by 2020, and health care will probably no longer be a part of the mix either, he forecast. Inch also renewed his caution that shares of GE could fall to $5-share on a free cash basis.

Shares of General Electric slipped as much as 2.5 percent intraday before paring losses to less than 1 percent.

Estimates and Target:

  • 2019 EPS estimate cut to 85c from 93c on “lower Power, Healthcare and Oil & Gas and timing of divestitures”
    • Bloomberg consensus estimate 80c (range 35c-$1.00)
  • 2020 EPS estimate to 36c (Street low) from 40c
    • Bloomberg estimate 88c (range 36c-$1.30)
  • 12-month price target cut to $7 from $10
  • GE has 10 buys, 11 holds, 2 sells, average price target $11, according to data compiled by Bloomberg

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