Shares of General Electric (GE) are on the rise after the recently appointed CEO Larry Culp disclosed the purchase of 225,000 shares at a price of $9.73 for a total value of $2.189M. Bearish on General Electric, Gordon Haskett analyst John Inch argued that GE could trade down to about $5 per share, assuming that GE Capital does not ultimately face insolvency if the market were to value the stock increasingly on a free cash basis. Meanwhile, the company responded to recent tax liabilities speculation, saying that it does not see change in regulation that would cause an increase in tax accrual.
POTENTIAL DOWNSIDE TO $5: In a research note to investors, Gordon Haskett’s Inch argued that General Electric could trade for about $5 per share if the market were to value GE increasingly on a free cash basis, assuming that GE Capital does not ultimately face insolvency. It would seem that most of the bullish analysts and investors are basing their upside views on sum-of-the-parts to value GE that invariably ascribe large valuations for the Aviation and Healthcare businesses, he contended. The analyst believes that the central problem with this approach is that it is “academic” as GE cannot completely dismantle to realize its true SOTP as the company is required to maintain a sufficient revenue and asset base to support all of GE Capital’s tens of billions of dollars of debt securities. Moreover, Inch pointed out that it seems doubtful, given GE’s excessive financial leverage, that its “crown jewel segments” would trade at peer EV/EBITDA multiples after apportioning GE’s high debt across its business parts. Additionally, the analyst believes that “no one, including the company, has an accurate handle on the magnitude of GE’s total and embedded on-balance sheet and off-balance sheet liabilities,” which could ultimately exceed $100B. He reiterated an Underperform rating and $10 price target on the shares.
