GE Just Shocked the World: Here's What Wall Street Had to Say
GE Just Shocked the World: Here's What Wall Street Had to Say
(Bloomberg) -- After General Electric Co. disappointed investors with its quarterly earnings and full-year forecast cut, the stock pared early losses, with several analysts saying the outlook is a total reset that may mark a trough for earnings. Others are now turning their attention to the company’s free cash flow and sustainability of its dividend after drilling into divisional results and stripping away extraneous charges. Shares dropped 0.3 percent to $23.51 at 1:25 p.m. in New York, after earlier falling as much as 6.3 percent, its worst slide in more than two years.
Morgan Stanley, Nigel Coe
(Equal Weight, $25 Price Target)
“GE’s third-quarter results will put the stock under continued pressure – we expect the stock to test new 12-month lows today - with weak cash flow and a substantial cut to earnings expectations that suggest more downside than expected to 2018 consensus numbers.”
“As bad as earnings undeniably are, the focus remains on cash.”
“While the build-up in working capital this quarter is likely unsustainable, this is not going to fan concerns over the sustainability of the $8 billion dividend burden.”
Stifel Financial Corp., Robert McCarthy
(Buy, $26 Price Target)
“The slides released for the call highlight new management’s focus on $2 billion-plus of cost out, targeting $20 billion of sales exits in 1-2 years, with potential further optionality to come.”
“Fourth-quarter trends look to continue with continued Power, O&G operating challenges. Given the poor year-to-date Industrial CFOA performance, the dividend decision has been deferred to November 13 analyst day, but it’s increasingly likely some cut is coming. In sum, weak quarter, guidance lowered, 2018 reset coming, dividend cut likelihood increasing.”
Melius Research LLC, Scott Davis
(Buy, $22.91 Price Target)
“The earnings re-set seems realistic. $1.05-$1.10 is a base level of very depressed earnings, lots of restructuring, probably an Oil/Gas trough, probably a Power trough. Hard to model anything lower. Admittedly now it’s a ’show me.’ We still view the underlying earnings power of the assets to be closer to $1.70-$1.80 with cash flow conversion at 95 percent, especially with revenue recognition accounting changes in 2018.”
“The dividend won’t be cut as GE will focus on growing free cash flow and earning into it – we think that’s the right answer as it forces the company to really drive free cash flow from here. They have no choice.”
“GE will likely sell Transportation, Lighting and about anything else that isn’t nailed down and very core. It’s hard not to imagine something bigger – like the spin of Healthcare."
“Not sure there is much more the bears can fixate on from here. We got the EPS re-set that was expected and it was definitely 10-20 cents worse than most expected. So the bear call was accurate. But short of a recession or collapse in oil prices – hard to picture anything more.”
William Blair, Nick Heymann
(Outperform)
“Today you got the worst news as it relates to what the theoretical trough year is going to be for the earnings and you got the worse news on the trough year as it relates to the CFOA. From here it’s going to get better, the question is how much and how fast, and will it be enough to be able to support and sustain the dividend or will you reduce it materially after the end of this year?”
“If you were able to document why you didn’t need to change the dividend and people saw that was a prudent and rational decision, then you’ve got a stock that’s going to come up like a ball under water and you’ll go to $30, $32"
RBC Capital Markets LLC, Deane Dray
(Outperform, $27 Price Target)
"It appears that GE is now ’kitchen-sinking’ its 2017 guidance ahead of its much-anticipated November 13 outlook meeting, where new CEO John Flannery will unveil his vision for the company and long-term strategic roadmap. We also highlight that there is no commentary in the slides about 2018 or the dividend. The headline third-quarter results today include a 6-cent operating miss, 13 cents of impairment charges, and 3 cents of higher restructuring charges, along with the 21 cent gain from the sale of GE Water. ”
“GE also cut its cash flow guidance from ~$12 billion to ~$7 billion, partly attributed to lower Power volumes. We expect this cash flow shortfall will increase the intensity for GE to cut its 96c dividend. This earnings and cash flow reset essentially overshadows the rest of its third-quarter operating results. ”
To contact the reporters on this story: Morwenna Coniam in New York at mconiam@bloomberg.net, Kristine Owram in Toronto at kowram@bloomberg.net.
To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Courtney Dentch, Chris Nagi
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