GE Can’t Take Credit for This Stock Pop

(Bloomberg Opinion) -- General Electric Co.’s stock price is a game of shareholder confidence, and for once, the company is winning. But not because of anything it did or said.

Shares of the troubled industrial conglomerate jumped as much as 12 percent on Thursday morning and were on track for the biggest gain since 2015. That shows how long it’s been since GE has had tangible good news; unfortunately, investors are still waiting for that. The primary driver of GE’s stock pop on Thursday wasn’t clarity around liabilities at GE Capital or the company’s plan to pay down debt. It was the fact that JPMorgan Chase & Co. analyst Steve Tusa, the most notable GE bear for the past few years, changed his recommendation on the stock from “underweight” to “neutral.” 

This strikes me as an upgrade by technicality. Importantly, Tusa isn’t modifying his call that GE’s stock price will fall to $6, and he remains wary of the collision of weak cash flow with a need to reduce an estimated $65 billion in straight debt, soft liabilities and pension expense to get back to more normal leverage levels. But with the stock closing at $6.71 on Wednesday, Tusa now sees those challenges as being at least partially reflected in the stock price and no longer advises shorting the shares at these levels. To get to his upside scenario of $8, though, the liabilities at GE’s financial arm need to be significantly less than what he’s currently estimating, and again, we still have no answers on that.

GE Can’t Take Credit for This Stock Pop
Just to take a step back, it is worth marveling at the contrast between Thursday’s stock jump and the two times new CEO Larry Culp has publicly addressed GE shareholders. The stock fell 8.8 percent after he hosted his first earnings call as he fluctuated between decisiveness on some points and non-committal, evasive answers on others. He had nothing new to share when he appeared on CNBC on Nov. 12 and the stock dropped another 6.9 percent. That should tell the company something. Investors are eager to believe in GE again, but they can’t do so without some sort of benchmark on potential cash needs at GE Capital and a viable plan to stabilize the power unit. And right now, the JPMorgan analyst is a more credible source of optimism than management.

Lost in the euphoria over Tusa’s upgrade on Thursday was the fact that he increasingly sees a need for GE to do a material equity raise. Culp was wrong to rebuff the idea on the company’s third-quarter earnings call, and he later walked this back in the CNBC interview, saying GE may reconsider selling stock “as conditions change in the future.” This would get the proverbial monkey off Culp’s back by easing investors’ concerns over GE’s leverage and allow him to be more thoughtful about asset sales. In GE’s case, I don’t think an equity raise would be as painful as it usually is, given the obvious interest in participating in the industrial giant’s turnaround.

GE Can’t Take Credit for This Stock Pop
GE’s other news on Thursday is an example of the tricky balance Culp must strike between an acknowledgment of the company’s depleted resources and a need to keep its remaining businesses competitive. GE will form a separate company to house its $1.2 billion in annual revenue from the Predix software platform and other digital assets. For now, this is essentially just a shuffling of the deck: The business will remain wholly owned by GE, so the digital arm will continue to fight with the company’s bloated debt load and the power unit’s restructuring bill for investment dollars. But it’s a symbolic pivot away from former CEO Jeff Immelt’s vision of making GE one of the world’s top 10 software companies, and could eventually set the business up for a divestiture.

Also on Thursday, GE agreed to sell a majority stake in its ServiceMax provider of field-technician software tools to buyout firm Silver Lake. Terms weren’t disclosed, but given GE’s challenges, I have to think that if the price was meaningfully above or even in the ballpark of the $915 million Immelt paid for ServiceMax in 2017, GE would have been shouting about it from the rooftops. That deal provides a potential template for an eventual sale of GE’s other software assets, though. The company will retain a 10 percent stake in ServiceMax and has inked a reseller agreement to ensure ongoing collaboration, including for its own operations. As I argued when reports arose earlier this year about a possible sale of key digital assets, partnerships like this are the best outcome as GE attempts to keep pace with an increasingly digital industrial sector.

No one could call Culp a slouch: In a little over two months on the job, he’s cut the dividend, jump-started the sale of GE’s stake in the Baker Hughes energy assets, split up the company’s power unit, made smart boardroom changes, and now announced this digital deal. It may be that Thursday’s optimism is well-founded, but he’s still got a ways to go to prove that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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