JPMorgan: Why GE's Earnings Beat Wasn't Really A Beat

General Electric Company GE shares are up 12.9% so far in the month of September on renewed optimism about the company’s long-term turnaround plan. However, one analyst thinks the optimism appears misplaced given there are few signs of improvement in GE’s core Power business.

The Analyst

JPMorgan analyst Stephen Tusa reiterated his Underweight rating and $5 price target for GE.

The Thesis

Tusa said GE management’s recent guidance hike and bullish commentary is lacking detail about what exactly is improving and why.

Tusa said GE’s Power segment beat in the second quarter and management’s new Power segment EPS and free cash flow guidance are somewhat deceiving given the second quarter was the first quarter under the restructured Power segment. In other words, there was no apples-to-apples prior guidance to compare the new numbers to, and Tusa said management didn’t go into much detail in terms of breaking down the new segment’s numbers.

“The only way to actually judge the result, in our view, is to combine Renewables (which took on Grid) and Power, and here, the result was a miss to our below consensus estimates, and we came away from the 2Q lowering our annual profit forecast for Power & Renewables combined,” Tusa wrote in a note.

Tusa said the new guidance numbers are equally unreliable given GE has not yet released restated financials for the second half of 2018.

For now Tusa struggles to see how GE reporting earnings and cash flow beats by not delivering loss-leading products, not restructuring and not investing in future technology constitutes an improvement to GE’s long-term business.

Benzinga’s Take

GE investors have gotten so much bad news for so long that the relative lack of bad news so far in 2019 must seem pretty bullish. However, GE still has a long path to recovery and there will continue to be a lot of noise in its numbers in the near-term as it works through its restructuring.

Do you agree with this take? Email with your thoughts.

Related Links:

Morgan Stanley: GE's Core Strengths Offset By 'Opaque Potential Cash Needs'

Citi: General Electric's Recovery 'Could Be More Significant' Than Investors Realize

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