GE's big shake-up won't actually do what it's intended to do, JPMorgan says

  • General Electric‘s reorganization is intended to ease its debt burden.
  • The reorganization won’t accomplish what management thinks it will, JPMorgan analyst Stephen Tusa wrote in a note out to clients.
  • Tusa’s pessimism is in contrast to what some on Wall Street believe.
  • Oppenheimer upgraded the stock on Tuesday.
  • Watch GE trade in real time here.

Wall Street is loving General Electric‘s big plan to shake up its entire corporate structure.

Shares have gained more than 11% since Tuesday, when the company announced the plan to spin off its healthcare business and sell its majority stake in oil services company Baker Hughes. Oppenheimer analyst Christopher Glynn upgraded the stock on the news.

But JPMorgan begs to differ.

“This is not truly “de-risking,”” JPMorgan analyst Stephen Tusa wrote in a note out to clients on Wednesday. “We continue to scratch our heads as to how the ratings agencies can so quickly reaffirm when a major part of the rating depended on diversity which is now clearly gone.” On Tuesday, Moody’s said GE’s reorganization is “a net credit positive, and a key driver behind the affirmation of the company’s ratings.”

While much of the reorganization is intended to shave down the GE’s debt load, Tusa thinks the plan actually does very little to deleverage the company. “There is actually little new deleveraging here for the enterprise, as we are not sure how an incremental ~$US5B of net industrial cash brought can turn into $US60B+, and therefore this plan falls well short of what we view as a number to truly de- risk,” he wrote.

Tusa’s analysis lands GE’s net debt at 3.9x EBITDA by the end of 2018. That’s significantly higher than the 3.5x that many on Wall Street are projecting. Tusa says that number “is not quite accurate as it gives credit for cash from initial asset sales but still includes related EBITDA, adjusting for which would bring the number to 3.9x.”

And the debt situation doesn’t improve a whole lot as time goes on, according to Tusa. While GE’s target deleveraging ratio is less than 2.5x EBITDA by 2020, Tusa thinks it will still be above 3.5x at that time. And even if GE reaches its target, it’d still have more debt that the competition.

Screen Shot 2018 06 27 at 1.43.08 PMJPMorgan

Tusa’s projections are largely against the day’s narrative on GE. Oppenheimer’s Christopher Glynn upgraded GE shares to “market perform” from “market underperform,” citing his optimism in the company’s new structure.

The upgrade is “based on potential for portfolio plan to unlock some value, and diminish liabilities,” Glynn said. “We view GE’s 2018 guidance as predicated on near perfect execution at Aviation and Healthcare, barring contingency that the company sees some pivot in Power fundamentals.”

GE is down 21.71% this year.

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