Deutsche Bank downgraded shares of General Electric Company (NYSE:GE), as it believes the shares are overvalued, given weak earnings quality and the wide gap between cash and non-cash earnings.
Earnings Quality Pressures
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Analyst John Inch enumerated the earnings quality pressures:
- Inclusion of non-operating pension accounting coupled with a high level of underfunded pension obligations.
- Ultra-low tax rates that could pose a future earnings headwind.
- LTSA non-cash earnings contribution.
- Pro forma quarterly matching of gains against a plethora of charges.
Weak Cash Flow Worsens Further
Deutsche Bank noted GE's weak cash flow has become worse in recent quarters. On an operating basis, excluding GE Capital dividends and proceeds from business and asset divestitures, the firm thinks GE does not appear to be generating sufficient cash flow to sustain its operations.
"Eventually, GE could proportionately run out of things to sell while the Capital dividend should largely be gone after 2018," the firm opined.
"Meanwhile, GE Industrial debt has continued to climb."
Earnings Could Be Reset Lower
Deutsch Bank anticipates GE's leadership to remain in place for the foreseeable future. This is despite bullish GE investors and analysts continuing to tout the prospects for leadership change as an upside share price catalyst.
However, in the event of a future leadership succession announcement, the firm cautions the next CEO could opt to significantly reset earnings targets lower, possibly closer to actual cash generation.
In turn, the firm thinks the market could be negatively surprised by this prospective reset.
Downgrading Rating: Lowering Estimate, Price Target
The firm lowered its 2018 earnings per share estimate to $1.85 from $1.91.
Deutsche Bank downgraded shares of General Electric to Sell from Hold and lowered its price target to $24 from $28.
At time of writing, GE shares were down 2.86 percent at $28.06.
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