In what has become a trend, General Electric Co. is having a very bad day.
Shares of the struggling industrial conglomerate fell below the $ 9 mark on Friday and have already fallen by more than 10% to just $ 8.15. GE's actions have now declined in eight of the nine sessions since the disastrous update of its third quarter results. The cash flow expected from the reduction in GE's dividend has been overshadowed by the operating and cash flow problems of its struggling production unit; lack of will on its goal of reducing the leverage effect; and disclosure of an expanded SEC investigation of its accounting practices has also attracted the attention of the Department of Justice.
If you bought GE shares on September 7, 2001, when Jeff Immelt took over from Jack Welch as CEO and chairman, Friday's recession would have brought a total return with dividends of nearly 63%, according to the data. compiled by Bloomberg. The S & P 500 index is up about 260% over the same period, while a basket of industrial companies has risen more than 275%. Immelt resigned in August of last year, giving up the baton to John Flannery, who lasted only 14 months before being replaced by former Danaher Corp. CEO Larry Culp in October. So far, it's not clear that Culp has better ideas than Flannery on how to speed up GE's recovery.
Friday's stock ticking was a negative report by Steve Tusa, an analyst at JPMorgan Chase & Co., who lowered his price target on GE to just $ 6. If he's right – and his background on GE probably suggests it – the stock would then be at its lowest level in the early 1990s. In other words, GE could fall even lower than when of the financial crisis when he was forced to go to meet Warren Buffett, seeking a bailout. Tusa says it's not even the worst scenario and he can consider a stock below $ 5.
I have noticed that the biggest drops for GE come after investors have let themselves go to optimism and think that the company could finally be close to the lows. An example of this occurred in May when Flannery proclaimed that there was no quick fix to GE's problems at a conference where many analysts expected him to develop a more detailed adjustment. Part of the reason why GE's shares fell so hard after the release of the third quarter results is that they jumped 21% in a week to the news of Culp's nomination as a betting investor that this one could be the savior of society.
GE is still in free fall because there is still no answer to the many and growing questions about the company's earnings, its prospects for free cash flow and the size of its liabilities. The risks highlighted by Tusa in its power unit and capital hole risk report at GE Capital should not be new to investors, even if it is more pessimistic than before. It may end up being too negative, but it is difficult to prove until a firm reset of GE's financial data, including a reconciliation to GAAP. While GE's financial statements are audited, it is difficult to trust a company that, in one year, has reported a surprise shortfall of $ 15 billion in a traditional insurance company and a impairment of $ 22 billion on the balance of goodwill on just one quarter earlier. Shareholder lawsuits and regulatory investigations are imminent.
At the same time, the steady stream of bad news has been equated with Chinese water torture for all those who have the guts to bet on a turning point. Even if GE gets involved – and I think it's possible, with the help of creative mergers and acquisitions – it will take a lot of time and trouble. While waiting for answers and signs of progress, optimism seems to be a luxury that investors can hardly afford.
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Brooke Sutherland is a columnist for Bloomberg Opinion, specializing in transactions and industrial companies. She previously wrote a column on mergers and acquisitions for Bloomberg News.
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