Stephen Tusa of JPMorgan is regarded as the most prominent analyst of GE stock. While this stock has performed fabulously lately, Tusa has changed his outlook.
The market does pay attention to analysts, some more than others, and JPMorgan’s Stephen Tusa is one of those who people do watch pretty closely.
Tusa had been bullish on GE last December, or at least more bullish, when he upgraded the stock from underperform to neutral. We might not want to give too much credit here for recognizing that GE would put together the rally it did over the next few months, but this at least recognized that things should improve with this stock.
GE stock traded as high as $13.09 last October, but it was particularly prone to the broader market selloff that started around this time. While the market gave back 20%, GE dropped more than 50%.
For GE though, this move down isn’t against the trend, like it was with the stock market, it is part of a bigger downward trend that has been going on since the start of 2017. It traded above $30 then, and the ground has been sinking slowly beneath our feet since, now marked with a low of $6.45 last December 12.
This brings us to the time of Tusa’s upgrade to neutral, and underperform would have clearly been the right rating up until this point anyway. When your stock loses 80% of its value over two years, at a time where the stock market is moving up, this is underperforming indeed.
Since then, GE has been one of the hottest stocks on the S&P 500, and was back over $10 a share as late as Apr 2, but has fallen a bit from there the last few days. Many observers think that Tusa’s downgrade had a hand in this, and his remarks certainly dulled the enthusiasm that this stock has created lately.
Tusa Thinks This Rally is Way Overdone
Tusa believes that the business fundamentals at GE just don’t support this current recovery, let alone looking for more. He does not see this as improving, in fact he believes that things are getting worse on that front.
He feels that at present, many investors are “underestimating the severity of the challenges and underlying risks at GE, while overestimating the value of small positives.” He has downgraded the stock now to underperform again, and reduced his price target from $6 to $5.
When a stock is trading above $6, as it was at the time of Tusa’s December upgrade, and his price target is set at $6 at the time, this is not someone who sees this stock do very much, and a neutral rating is an appropriate one here.
This ended up not being what happened, and we can say that the stock moved up 38% not because of Tusa’s rating, but in spite of it. This was the wrong call back then, and it is still off by quite a bit, at least in this brief time.
We can say though that the direction of his recommendation was at least pointed the right way, and see the fact that it is now pointed the other way as perhaps being noteworthy.
Tusa is particularly concerned about what is happening to GE’s free cash flow numbers, especially with their being cut. He points out that the gap between earnings and free cash flow is “the widest we’ve ever seen.” Free cash flow can be used to grow the company, so this going down doesn’t bode well for a company’s growth.
Tusa’s earnings projections for GE are below the Street average though, and he sees adjusted earnings for 2019 coming in at 29 cents per share, in contrast to the average view of 55 cents. This really does come down to separate views of the company’s financial health, but Tusk believes that the free cash flow issue is one that we’re not taking into account enough.
Tusa’s concerns run deeper than this though. “The driver of our downgrade is the view that the Street is significantly over projecting the bounce in FCF [free cash flow] over the coming years, off levels that we calculate as zero currently, as Power/Renewables remains weak, GECS [GE Capital Services] will likely consume material cash for the foreseeable future, aviation fundamentals, as per underlying FCF, are weaker than meets the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession, for which a potentially dilutive sale of the rest of health care may be needed,” he wrote.
Most Analysts Are Nowhere Near This Bearish on GE Though
This does suggest greater risk exposure to a recession, and perhaps Tusa sees the risk of this being higher than your average analyst, which may partly explain the difference here. There’s not much to like from Tusa’s comments though, and these sure do suggest conditions that do not lend themselves to much growth.
It’s not that things are all that bleak though, even if Tusa’s view ends up being the correct one, as he’s only forecasting a 2 cent a share drop in earnings from 2019 to 2020, which is certainly not too terrible. Where the stock should be valued now though is the big question, and we need to remember that a lot of investors don’t really care that much about rather modest decreases in earnings, which are too small of a number to care about as well as over too short a time period.
If you’re looking at where GE’s stock may be at in 2030 for instance, 2019 and 2020 are only steps on a journey that is just beginning. We should not look at shorter-term forecasts like this and think that this means that the longer-term outlook is poor as well, because that might not be the case.
Still though, for those who follow or are invested in GE, reading Tusa’s analysis, together with seeing the price of the stock immediately drop by 5% on this news, may not be too comforting. This stock may actually not be that exciting on any time frame actually, and especially when this bull market ends, where GE may get more than its share of people running for the exits with stocks generally.
We’re not off the recent highs by much yet, and we’ll have to see which of the prognosticators people will choose to follow over the course of the next while, the more bearish Tusa or the more optimistic average analyst. When the market actually turns though, this will be a time where we really need to be paying attention either way.