GE's Latest Blast of Bad News Has Wall Street Bracing for More

(Bloomberg) -- General Electric Co.’s disclosure of a larger-than-expected $6.2 billion charge related to an old portfolio of long-term care insurance triggered the biggest drop in its shares in more than two months. And analysts say it could be just the beginning of a new wave of bad news from the manufacturer, whose shares plunged 45 percent last year as it undergoes a massive overhaul.

The company’s new chief executive officer John Flannery, who took the helm in August, suggested the company may now be open to a more radical divestment plan than the one outlined in November. Cowen & Co. says a break up of the company may not be economical as the company’s current share price is now worth more than the sum of its many parts. RBC Capital Markets says further charges wouldn’t be surprising and notes that bad news often “comes in installments.”

Cowen, Gautam Khanna

(Market perform, price target $17)
GE’s capital charge is “problematic on many levels.”

GE Capital’s “$15 billion of cash payments through 2024 related to a divested insurance portfolio raises concerns about eventual Industrial cash infusions to Capital, and reinforces our view that the sum-of-the-parts value of GE is below the current stock price.”

A break-up of GE “would be non-economic.” Khanna sees “no quick fix for the stock.”

RBC, Deane Dray

(Sector perform, price target $20)
GE’s insurance reserve is “much worse than anticipated.”

“Our prior experience has been that most reserve charges for distressed GE Capital businesses are usually inadequate in size and necessitate follow-on charges in subsequent years... We would not be surprised to see further charges related to GE Capital insurance businesses. We are reminded of the expression that ‘bad news comes in installments.’ ”

“Many investors are still looking at a wholesale breakup as the logical conclusion of this extended GE restructuring saga. As for the potential timing and extent of a breakup, we believe that much depends on how successfully GE is able to address the ongoing structural challenges in Power.”

Dray points out that “Flannery called out Power, Aviation, and Healthcare as being potential candidates for future staged exits, signaling that he was now open to a more transformative breakup scenario than the one he had previously communicated.”

William Blair, Nicholas Heymann

(Outperform)
“While the size of the charge is larger than many may have been expecting, we believe the fact that a charge of this magnitude did not allow GE Capital to divest North American Life & Health without recourse may be a larger concern for investors.”

The latest announcement will “resolve one of the two largest areas of unquantifiable unknowns for GE, the other being the sustainability of the performance of the power segment’s long-term service performance maintenance contracts.”

Bloomberg Intelligence, Karen Ubelhart

“GE’s announcement of a charge in its legacy insurance unit adds to concerns that the worst isn’t over. Potential for more surprises could erode confidence in the ability of new CEO Flannery, a company veteran, to turn GE around.”

“A $6.2 billion after-tax charge -- double guidance -- and $15 billion in cash requirements to be paid over seven years were surprising given annual asset tests.”

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Richard Richtmyer

©2018 Bloomberg L.P.