Finance

GE stock price hasn’t bottomed yet, RBC says

Published

6 years ago

September 28, 2018

GE CEO John Flannery General Electric Chief Executive Officer John Flannery presents the company’s new strategy and financial targets to investors at a meeting in New York.Reuters/Alwyn Scott

General Electric hasn’t bottomed yet and incremental bad news will continue to weigh on its stock price, RBC says.

“General Electric declined to ‘rip the band-aid’ during 2Q18 earnings and cut its full-year EPS guidance of $1.00,” a team of RBC analysts led by Deane Dray said in a note sent out to clients on Thursday. Dray added that investors are skeptical of GE’s ability to hit its full-year earnings per share guidance of $1.00-1.07 amid the company’s lagging power business, price-cost pressures compounded by US-China tariffs, and behind-schedule deliveries of its LEAP engine. Dray sees the full-year earnings to be $0.95 per share.

General Electric shares saw a huge sell-off over the past week, losing 8%, after the company said last Thursday that it discovered an “oxidation issue” that affects the lifespan of blades in its HA-Class turbines, a major product for its power division. The company later revealed that this issue impact another model, widening the latest problem to hit GE’s ailing power unit.

“While it is still too early to quantify the financial impact, we believe that the reputational damage to GE Power could result in share losses to Siemens (its competitor),” Dray noted. “To date, GE Power’s challenges had been market- driven/secular, but these new turbine issues are arguably self-inflicted.”

Shares of General Electric were under pressure this year, sinking 25% since CEO John Flannery said on May 22 that he expected the company’s power business to “remain weak through 2020.” In its recent earnings report in June, the company said profit from its power business dropped 58%, but was able to match expectations with solid earnings growth in its aviation and healthcare businesses.

However, Dray pointed out that GE’s aviation sector is running behind on LEAP engine deliveries. By his calculation, GE Aviation had initially set a target for delivering 1,100-1,200 LEAP engines in 2018, but only delivered 436 LEAP engines in the first half of 2018. “The back-half-weighted timing of these shipments could significantly pressure Aviation margins in the second half of 2018,” he said.

When talking about how a US-China trade war will impact GE, RBC analysts say it may not face a material impact, given that only 10% of its imports come from China. They said roughly half of the costs from the tariffs will be offset by duty drawbacks — for example credits for components that are imported from China for the assembly of equipment that is later exported out of the US.

The RBC team cut its price target to $13 from $15.

GE shares have plunged 36% this year, bringing $673 million in mark-to-market profits to traders betting against the stock, according to financial-analytics firm S3 Partners.

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