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 StockMorgan Stanley analyst Betsy Graseck last week called General Electric a "cash machine," and with the sale of its remaining stake in NBCUniversal to Comcast (CCV) 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 Lufkin Industries (LUFK) for $3.3 billion. "The move out of Plastics, NBC, and [GE Capital] 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.
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