Both RBC Capital analyst Deane Dray and Wolfe Research analyst Nigel Coe upgraded General Electric (GE) to Outperform after the company announced that H. Lawrence Culp, Jr. was named chairman and CEO, replacing John Flannery. But not all were as bullish on the stock after the news, with Moody's Investors Service placing the ratings of General Electric and GE Capital Global on review for downgrade, and JPMorgan analyst Stephen Tusa saying that the CEO change is a "negative surprise" that raises questions as to whether there are "serious issues at play."
BUY GE: Following the CEO change, RBC Capital's Dray upgraded General Electric to Outperform from Sector Perform and raised his price target on the stock to $15 from $13. While acknowledging that there is "still much to fix" and it will take time to assemble a team/triage the problems and put an imprint on the breakup plan, the analyst argued that a "floor has now been put in." Dray would not be surprised to see Culp try to persuade his longtime CFO at Danaher (DHR), Dan Comas, to join him at GE, and also anticipates seeing some senior-level departures at GE as part of this management shakeup. Meanwhile, Wolfe Research's Coe also upgraded General Electric to Outperform from Sector Perform and raised his price target on the stock to $16 from $15. The analyst noted that the appointment of Culp is a "game changer" in a number of respects, since it is a definitive signal of cultural change, performance accountability and that current problems are fixable. With Culp at the helm, the analyst told investors he "can have more confidence in strategic and tactical execution." Nonetheless, the analyst acknowledged that there are "still plenty of uncertainties." Also commenting on the news, Citi analyst Andrew Kaplowitz told investors in a research note of his own that he believes this is "a new beginning" for General Electric. While the Power business is "dramatically worse" than he thought, a "proven outside leader" can immediately accelerate the pace of change and execution, he contended. The analyst argued that the management change is bigger and more forward-looking than the $23B non-cash impairment the company will take on its Power business. Kaplowitz reiterated a Buy rating on the shares.
NEGATIVE SURPRISE: More bearish on the news, JPMorgan's Tusa said the timing and format of GE's CEO change announcement is a negative surprise that raises questions as to whether there are "serious issues at play." While the selection of ex-Danaher CEO Larry Culp is a positive for investor confidence and the change brings the company a step closer to a real reset, the details on how potentially bad things actually are have not been shared and Tusa sees a dividend cut and potential equity raise as likely. The analyst reiterated an Underweight rating and $10 price target on GE shares. Meanwhile, Moody's Investors Service placed the ratings of General Electric and GE Capital Global on review for downgrade, including the A2 senior unsecured debt rating and the P-1 short-term rating. A potential downgrade of the long-term ratings of GE and GE Capital may not be limited to one notch. This rating review was prompted by GE's announcement that it will fall short of its guidance for free cash flow and EPS for 2018 and that it expects to take a goodwill impairment charge related to the Power business that is likely to constitute substantially all of Power's current goodwill balance of approximately $23B. The change in GE's CEO and chairman was an additional consideration for the review.
WHAT'S NOTABLE: Emerson (EMR) announced it has agreed to acquire Intelligent Platforms, a division of General Electric. Terms of the deal were not disclosed. The acquisition is expected to close in the first half of fiscal 2019, subject to regulatory approvals, GE's consultation with employee representatives where required and other customary closing conditions.
PRICE ACTION: In morning trading, shares of GE have dropped almost 2% to $11.90.
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