General Electric (GE - Get Report) shares fell the most in a month Monday after one of Wall Street's most influential analysts lowered his rating for the struggling industrial giant and cut the group's price target.
JPMorgan's Stephen Tusa, one of the highest-rated analysts on Wall Street and long-time critic of GE's flagging business model, said investors are "underestimating the severity" of challenges and risks at the company while "overestimating the value of small positives". Tusa lowered his price target for GE by $1 to $5 a share, the lowest among major banks covering the firm, and cut his outlook to "underweight" from "neutral". Tusa also said GE's power and renewables business "remains weak" and that GE Capital Services will likely "consume material cash for the foreseeable future."
"The driver of the downgrade is our view that the Street is significantly over projecting the bounce in (free cash flow) in the coming years, off levels that we calculate at zero currently, as Power/Renewables remains weak," Tusa wrote. "GECS will likely consume material cash for the foreseeable future, Aviation fundamentals, as per underlying (free cash flow), are weaker than meet the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession, for which a potentially dilutive sale of the rest of Healthcare may be needed."
GE shares were marked 6.89% lower by mid-morning trade, the steepest decline since March 6, to change hands at $9.32 each, a move that would trim the stock's year-to-date advance to around 17% and value the Boston, Massachusetts-based group at around $81 billion.
In late February, Tusa cautioned that GE's move to sell the biopharma portion of its healthcare business to Danaher Corp. (DHR - Get Report) 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.
Tusa 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".
GE CEO Larry Culp told investors in February 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.
Culp said debt reduction and boosting its dividend to a level "in line with our peers" would be the company's near-term focus, adding the payout, 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.
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) .
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.