Moody's Says General Electric Bonds Are 'Stable,' but That's Not a Call on the Business or Stock -- Barrons.com
By Al Root
Moody's updated its opinion of General Electric bonds on Friday, calling the company's outlook "stable."
JPMorgan analyst Stephen Tusa, who has expressed bearish sentiments on GE stock (ticker: GE), took exception to the revised Moody's outlook in a Monday research report. The conflict, however, looks like it is more about semantics instead of a fundamental difference of opinion between Wall Street equity and bond analysts.
"Stable?" was the title of Tusa's research report and he went on to question Moody's rationale. "Other items [in the credit report] include a vague reference to [Moody's] expectation for intra-quarter funding to go up in the coming quarters, not down, and a continuing value placed on backlog for which we struggle to understand the rationale." Tusa believes GE's business hasn't improved since Moody's downgraded GE's bond rating in October.
Moody's, for its part, noted the sale of GE's biopharma business to Danaher (DHR) improves corporate liquidity, but performance at GE Power remains weak. None of that, however, qualifies as news for equity investors today.
What's more, "stable" at a bond-rating agency isn't a call on the underlying business. It simply means Moody's is unlikely to change the bond rating soon.
Still, the spat highlights an important less for GE shareholders -- check the bond prices.
Equity investors don't always check corporate bond prices, but the bond market is another set of eyes on a company and is more focused on cash flow and financial stability than on earning-per-share growth and valuation multiples. The bond market, at times, can tell equity investors that problems are on the horizon. For instance, GE senior unsecured bonds -- the kind that Moody's just reported on -- actually weakened relative to Treasury bonds and other similarly rated corporate bonds in 2016, when GE stock was still trading at more than $30 a share.
Investors need to check bond prices relative to Treasuries -- or the government bond yields where a corporate bond is issued -- because government bonds are supposed to be risk-free holdings for investors (in theory, anyway). Corporate bonds trade at spread over risk-free bonds. When a corporate bond spread starts to diverge from government bonds it means that bond investors are worried about something.
Investors also need check bond prices relative to other corporate bonds. If equity investors don't pay attention to other corporate issues they can draw incorrect conclusions. Like in December, when the entire stock and bond markets sold off. Corporate bond yields expanded because of a generalized fear of a slowing economy -- every investor and every corporate-bond issuer had the same problem.
Since the 2016 signal, GE senior unsecured bonds were downgraded by Moody's and they also sold off sharply in December, like other corporate-bond issues. But, as with GE's stock price, bonds have recovered since Christmas.
That can lead equity investors to the conclusion that bond investors think things are getting better at GE.
Still, GE bonds trade at a wider spread to similarly rated corporate bonds. That means bond investors also think GE isn't out of the woods, yet. GE's senior unsecured bonds are rated Baa 1 by Moody's, which is a lower-tier investment-grade rating. Baa 1 bonds maturing around the same time trade at about a 1.8% spread over 10-year Treasuries, yielding about 3.9%. The GE bonds Barron's checked yield close to 4%, or about 0.1% to 0.2% above similarly rated corporate bonds. The GE bonds, according to the bond market, are a little riskier.
For bearish equities analysts such as Tusa, the call on GE stock now seems to be about GE CEO Larry Culp's ability to turn GE Power around. Some Wall Street analysts are willing to give Culp the benefit of the doubt, others aren't. What bulls and bears can probably agree on is that, however, is for the foreseeable, the bond and stock markets will be on the watch for the same thing at GE -- cash flows in the company's ailing power division.
GE shares are down 1.3% in Monday morning trading, worse than the 0.1% drop of the Dow Jones Industrial Average.