The stock market no longer seems to have much respect for general conglomerates. It turns out that amalgamating a bunch of unrelated businesses and marrying them together with no synergies at all other than a monster balance sheet and a 20% or so return on capital target does not make for an easy valuation analysis. General Electric Co. (NYSE: GE) was the world’s top conglomerate for years. Now GE is a messy conglomerate for which seems harder and harder to assign a real valuation without controversies.
One firm that has been quite negative for some time is JPMorgan. Steve Tusa, the analyst behind the firm’s rating, has now turned even more negative in valuing GE. Tusa had tried to be less negative on GE back in March by upgrading the stock to Neutral from Underweight and raising his target to $8 from $5 in what Wall Street was looking at as a capitulation upgrade, but the problem in March was that there was another three weeks of massive pain before the market hit that massive V-bottom.
Remember that, regardless of how positive or negative a case is made, no single analyst report should ever be used as the sole reason to buy or sell a stock.
Tusa now has formally withdrawn his formal price target on GE. The analyst has put his fair value at less than $5 per share. Tusa still sees GE’s formal rating as Neutral, but GE did not even trade under $5.00 during the panic selling lows of March, after trading above $13 for a very brief period in February before the stock market came to its senses about the impending coronavirus-induced instant recession.
Tusa’s key message does not sound that neutral at all: “we see little equity value here.”
JPMorgan’s current call estimates GE’s 2020 cash flow to be −$4.5 billion. That is after viewing only breakeven results for the second half of 2020. That said, Tusa does not see formal guidance from GE. Despite CEO Larry Culp’s contract being extended last week to 2024, Tusa believes that GE is having difficulties seeing even out for the next three to six months.
One further issue brought up in the JPMorgan report is that analysts from competing firms have been persistently optimistic in their assessments of GE’s turnaround plans. GE’s own view is that sequential improvement in the second-half is achievable on cash flows and that GE is targeting positive cash flow in 2021.
By removing the formal price target and by saying there is little equity value, it easily could be interpreted that GE is worthless as it stands today. This call does not formally predict that GE’s stock is going to zero dollars, but it certainly is not suggesting any hope of upside ahead.
The upside views for General Electric were not given much of a boost after the stock was booted out of the Dow Jones industrial average. GE’s market cap of $56 billion now makes it only ranked at about 115th place in the weighting of the S&P 500 members, before factoring in dual-classes of some other stocks.
Culp is supposed to be a super-star CEO. He joined the company in October of 2018, and his compensation plan has been adjusted. The pandemic is certainly not his fault, and Culp cannot make the airline industry come back to where it was before the start of March, even if that Boeing 737 Max is ever recertified by the FAA. This still adds up to a scenario in which GE faces more headwinds than tailwinds.
Monday’s reaction took General Electric stock down another 4.6% to $6.30 in mid-afternoon trading. GE’s consensus target price from Refinitiv is just $7.75, and the 52-week trading range is $5.48 to $13.26.
Will Tusa’s title for his next report refer to this conglomerate as General Eclectic?