Is Regulation A Risk For GE?

In a report published Thursday, Morgan Stanley analyst Nigel Coe previewed General Electric Company GE's upcoming second quarter results, noting that the regulatory approval process for Alstom and Appliances will be a key focus.

The European Union competition commission has previously issued a Statement of Objections relating to "concentration concerns" in the European gas market, while domestically the Department of Justice is suing to block the Electrolux purchase of Appliance.

According to Coe's discussions with key investors, the market is assuming a 75 percent probability of closure related to Alstom while the Appliances deal has only a 50/50 chance of closure. However, the analyst added that the Appliance transaction "has a largely immaterial impact" to his investment thesis.

"GE says it remains confident that the Alstom deal will close, and we believe it would be a modest catalyst," Coe wrote. "We also believe that the path to $2 headline EPS in 2018 is reasonable, although we would need to reassess Alstom accretion math (15-20c) in light of erosion to core fundamentals over past 12 months and any remedies."

Related Link: Market Strategist Says General Electric Shares Aren't 'Sexy,' But Dividend & Balance Sheet Make It A Buy

Q2 Estimates Revised

The analyst lowered his second quarter earnings per share estimate to $0.29 from a previous $0.33 as he moves the Appliances gain into the fourth quarter to reflect "DoJ concerns." On the other hand, since the revised estimate is a "phasing issue," Roe's full year earnings per share estimates are now only a penny lower at $1.28.

Finally, Roe noted that his main concern in owning shares of GE is the fact that it is trading at more than a 17x multiple on 2018 estimates and its risk to reward profile "skews higher" following the post April 10 correction.

Shares remain Equal-weight rated with an unchanged $29 price target.