General Electric's (GE - Get Report) move to sell the biopharma portion of its healthcare business to Danaher Corp. (DHR - Get Report) likely gives the company and extra $3.5 billion it can use to reduce its balance sheet, but will also cut into overall earnings in an already weakened company, according to one of Wall Street's top analysts.
JPMorgan's Stephen Tusa, one of the most influential analysts on Wall Street and long-time critic of GE's flagging business model, said that while the $20.5 billion in cash it will get from Danaher was more than many had expected, it still leaves GE Heathcare as an asset that is "short on growth, with an implied total EV that is below" based Tusa's recent analysis, with around $17 billion in annual revenues and operating margins "in the mid-teens".
As a result, Tusa is holding his price target on GE unchanged at $6 per share, cautioning that the biopharma sale unmasks "the underappreciated enterprise cash burn we see at sustainably in the $2 billion range" even with the extra $3.5 billion the sale generates compared to earlier plans to float around 20% of the healthcare division through and initial public offering.
"As we have said before, this is NOT about liquidity, this is about the company raising cash by selling earnings to reduce leverage and liabilities," Tusa said in a note published Wednesday, which also lowered the 202 earning estimate by 7 cents to 30 cents per share. "While a core business burns cash, even including Healthcare, which we address below, after which we provide our analysis around Healthcare."
GE shares were marked 1.36% higher in early Wednesday trading and changing hands at $10.80 each, helped by a letter to investors from CEO Larry Culp that focused on debt reduction and boosting its dividend to a level "in line with our peers" after one of the worst years on record for the iconic industrial giant.
Culp vowed that 2019 would be a "year of change" for the group, and pledged to focus on both developing GE's critical power business while reducing debt through asset sales and spin-offs.
He also said the company's dividend, which was slashed to just one penny last year amid a series of profit warnings, asset write-downs and broader investor skepticism, allowed GE to retain around $4 billion in cash but would be returned to an industry-competitive level once the balance sheet was stabilized.
"Simply put, we have too much debt and we need to reduce it thoughtfully and soon," Culp said. "Once we put our balance sheet in a healthier place, we'll be in a better position to play offense across all our businesses."
Culp, in only a few months at helm of the struggling group, has raised more than $21 billion through the sale of GE's biopharma unit to his former company, Danaher Corp. (DHR - Get Report) , pledged to shed the group's healthcare division and reduced its stake in Houston-based oil services group Baker Hughes (BHGE - Get Report) .
"Under Culp, GE has been accelerating its strategy to strengthen and deleverage the balance sheet," said Credit Suisse analyst John Walsh. "On Q4, GE highlighted $30 billion of expected cash proceeds from Healthcare, (Baker Hughes), and Wabtec, and (the biopharma sale) is a significant down payment."
"It is unclear if this will trigger upwards revisions from a credit perspective, as it was part of the announced strategy, but faster influx of cash proceeds is a positive," he added.
GE is currently rated BBB+ by Standard & Poor's, three notches above junk status, but it unlikely to be lifted into the single-A range thanks in part to its struggling power business.
"Looking ahead, it seems like most want to use 2020 as their marker, though to think Power can V-shape in one year, or that (GE Capital Services) will be fully capitalized by then is highly optimistic, in our view," Tusa wrote.