JPMorgan's Stephen Tusa Expresses More Conviction In Bearish GE Thesis After Aviation Deep Dive

Even after gaining 13.8% year to date in 2019, General Electric Company GE shares are still down more than 70% overall in the past three years. A top GE bear said Friday that consensus expectations for GE’s core Aviation segment are still too high.

The Analyst

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

The Thesis

Tusa said a deep dive into GE’s Aviation fundamentals and financials suggests the market is pricing in more grown and less risk than it should for GE.

“We think investors over-estimate the sustainability of growth whileunder-estimating risks, all of which should be reflected in a more conservative value, with the balance sheet dynamics a key reason why an SOTP analysis that assumes this business can stand on its own is unconvincing to us,” Tusa wrote in a note.

Tusa listed four reasons GE’s Aviation business is overvalued:

• Base services revenue and profits are peaking.
• Spare engines create a negative mix shift in original equipment in the near-term.
• Free cash flow in 2017 and 2018 was above its historical levels based on customer behavior and is at risk of collapsing if the macro environment deteriorates.
• Aviation’s balance sheet is too small, limiting strategic flexibility.

Looking ahead to 2020, Tusa is forecasting $5.7 billion in profits from the aviation segment, down 17% year-over-year and about $1.2 billion below consensus estimates.

Benzinga’s Take

GE is taking an aggressive approach to selling off assets, shoring up its balance sheet and streamlining its business. However, the company will need to demonstrate to investors that it can consistently grow cash flow, revenue and earnings in the long-term before buyers can confidently begin to step in.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

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

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

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