Stop Buying General Electric: JPMorgan (Update 1)
Philip van Doorn
04/22/13 - 10:49 AM EDT
Updated from 8:50 a.m. ET with morning market action and comment from Nomura analyst Shannon O'Callaghan.
NEW YORK (
) -- The fallout has begun, following the revenue declines reported by
JPMorgan Chase analyst Stephen Tusa on Monday downgraded GE to a neutral rating, after his firm had recommended the shares with a "buy" rating for three years, saying in a note to clients that "the stock is dead money near term." The analyst lowered his price target for the shares to $22 from $24, while lowering his 2013 earnings estimate for the company by a penny to $1.64, and lowering his 2014 EPS estimate by 2 cents to $1.78.
General Electric's shares declined 4% on Friday to close at $21.75, after the company beat the consensus EPS estimates for first-quarter earnings and revenue, but
disappointed investors by announcing a significant year-over-year revenue decline
GE's total industrial revenue for the first quarter was $34.209 billion, declining 6% from a year earlier. The most affected segment was Power & Water, with first-quarter revenue declining to $4.825 billion from $6.551 billion in the first quarter of 2012. The company had expected to see lower gas and wind turbine orders, but the numbers were still striking.
GE Chief Financial Officer Keith Sherin said during the company's earnings call on Friday that GE received eight gas turbine orders during the first quarter, down from 23 a year earlier, while wind turbine orders declined to 584 in the first quarter from 696 in the first quarter of 2012.
GE CEO Jeff Immelt said during the call that overall industrial orders during the first quarter were up 3% from a year earlier. "Equipment orders were up 10% and we had a 1.3 times book-to-bill ratio in the quarter," he said. "This gives us confidence in our delivery schedule for the second half and beyond."
Immelt also said "margins were negatively impacted by some of the revenue shortfalls in Europe in Power & Water, but we remain on track to deliver the 70 basis points margin expansion this year and we will show you more details later in the deck."
GE's industrial margin for the first quarter was 12.9%, declining 70 basis points from a year earlier, "but up 40 basis points excluding the Power & Water cycle," according to Immelt.
In explaining his downgrade of GE, Tusa wrote "it is not our style to move ratings in the direction of news flow, but we view Friday's report as more of an exclamation point on the last six months that has made it impossible to stick with a key tenet of our rating."
That "key tenet" was JPMorgan's long-term view that GE was a "safety stock" during difficult economic periods, "highlighted by a best-in-class performance last downturn." According to Tusa, that basis for buying GE's stock "is now increasingly hard to defend."
"Additionally, with lower growth, and now a best case 70bps of margin this year, Industrial profit growth of ~7% is now mediocre versus the group," Tusa wrote, adding that he saw "above average" risks to profit growth in the second half of 2013.
In another candid comment about analysts' stock ratings, Tusa wrote that his firm was not playing "the 'Sell Side' waiting game" with its rating of GE.
Cash and Stock
Morgan Stanley analyst Betsy Graseck last week called General Electric a "cash machine," and with the sale of its remaining stake in NBCUniversal to
for $18.1 billion during the first quarter, GE's cash and cash equivalents rose to $90 billion as of March 31, from $77 billion in December. The company plans for up to $10 billion in share buybacks during 2013, and completed $1.9 billion in buybacks during the first quarter.
GE also deployed some of its cash hoard through the purchase of oil drilling equipment manufacturer
for $3.3 billion.
"The move out of Plastics, NBC, and
and into Oil/Gas has been a long term strategic positive," Tusa wrote, "and we give credit for this migration."
But Tusa added "we don't think portfolio quality is an issue, but size and complexity is, at minimum, a stubborn headwind for investors, and, in a worst case, may be showing its strain regarding management's ability to accurately forecast its business."
Of course, General Electric is a very big ship to turn around, and its focus away from its finance business and push to grow its oil and gas business will take many years to play out. Sell-side analysts' price targets tend to be 12-month price targets, so truly long-term investors who can stay committed for many years may not be as concerned about GE's ability to forecast its results a year in advance.
GE's shares were down over 2% in late morning trading, to $21.28, while the broad indices all showed slight declines.
Nomura analyst Shannon O'Callaghan has a neutral rating on General Electric, and in a note to clients Monday morning said "Power & Water margins of 14.9% in 1Q were down 320 bps y/y on lower gas and wind turbines as well as lower European service (low utilization), but the company is planning on flat margins for the year in the segment, requiring sharp improvement from here."
"We see potential risk to these targets," O'Callaghan wrote. He also lowered his EPS estimate for GE in 2013 to $1.67 from $1.70, while lowering his 2014 EPS estimate to $1.81 to $1.87. O'Callaghan also lowered his price target for GE by a dollar, to $23.00.
GE's shares returned 4.5% year-to-date through Friday's close at $21.75. The shares trade for 11.8 times the consensus 2014 EPS estimate of $1.84, among analysts polled by
. The consensus 2013 EPS estimate is $1.67.
Based on a quarterly payout of 19 cents, the shares have a dividend yield of 3.49%.
Interested in more on General Electric? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.