Source below. It's f---ing depressing.
General Electric: The Fun’s Just Getting Started
General Electric is scheduled to report earnings on Friday, and JPMorgan's C. Stephen Tusa is reliably bearish ahead of the print.
By Ben Levisohn Updated Oct. 18, 2017 1:28 p.m. ET
General Electric (GE) is scheduled to report earnings on Friday, and no one is expecting it to be a quiet day. The industrial giant's stock has been beaten up this year amid earnings disappointments, management changes and chatter about a possible dividend cut, and its earnings will be dissected for evidence that the worst is behind General Electric--or still to come.
You probably already know where JPMorgan's C. Stephen Tusa and team stand. They've been the biggest General Electric bears on the Street, and more importantly, they've been right. While they "continue to believe that GE stock should go lower," they also acknowledge that "there are a myriad of potential moves from the company on the way, visibility around which will improve starting this Friday with earnings." Unfortunately, most of those moves won't change the trajectory of General Electric's fundamentals. Tusa and team explain:
While Sell Side Bulls will likely label any change in story a “transformation” (even though most labeled what we just saw the same thing), we see what we would characterize as an equity “workout/restructuring”, where the company is ultimately figuring out a way to support the current dividend, or cut the dividend and then grow with cost cuts to a point where there is excess optionality to truly reposition for growth. The question beyond this, however, is “what does a buyer of GE own after this cut”? What we see is an outlook for growth that is shackled by either currently high margin levels in businesses that are “ok” for now (Aviation MSD top line but with high margins, HC LSD with high margins and pricing pressure), or structural challenges in fossil related businesses like Power (discussed at length already), Oil/Gas (late cycle demand still looking for bottom), and Transportation (extended trough) – we see industrial revenue going from $115B in ’17 to $110 B in ’20, including potential project selectivity (~$1 B of stranded costs that would need to be restructured for every $5 B they walk away from, while down orders, both cyclically and selectively would mean weaker cash from lower progress payments, which were +$2 B in ‘16) and announced divestitures, both of which would be dilutive to future cash flow growth, tough to fight through with cost cuts alone. All of this with a backdrop of weak standing cash flow providing limited optionality, and such company specific items like ultimate value of $29 B in contract assets, viability of which depends to a degree on digital legitimacy $17 B of Alstom Goodwill likely at risk, a myriad of JVs for which there is limited disclosure, and liabilities including pension, GE Capital debt that is guaranteed, and a lingering insurance liability that remains a TBD. This is far from a simple cyclical dynamic.
We'll learn more on Friday.
Shares of General Electric have declined 0.3% to $23.13 at 1:20 p.m. today, while the Industrial Select Sector SPDR ETF (XLI) has risen 0.1% to $72.05.
Source: http://www.barrons.com/articles/general-electric-the-funs-just-getting-started-1508347680