A GE Bear Says Economy May Be 'Inching Toward a Recession' -- Barrons.com
By Al Root
Third-quarter earnings season is here and so are Wall Street preview reports. J.P. Morgan analyst Stephen Tusa, a bear on General Electric stock, looked at the outlook for the company's quarterly results, as well as those of other industrial companies he tracks.
He's still bearish on GE shares and is worried the U.S. is "inching toward a recession." RBC analyst Deane Dray is more upbeat about the industrial conglomerate, though he acknowledges the challenges it faces.
GE is scheduled to report its earnings on Oct. 30.
Of course, fear of a recession has been increasing for a while and expectations about the outlook have come down. But lower expectations aren't enough to save stocks, according to Tusa.
"Don't expect to see enough to justify a meaningful rebound in sentiment, " the analyst warned. "Absent resolution on the trade front [evidence] continues to build around a more negative fundamental backdrop with the focus shifting to 2020."
The back story. General Electric (ticker: GE) is the highest-profile name Tusa covers. The company has had quite a year or two -- with three CEOs, multiple asset sales, corporate restructuring, and questions about its accounting practices.
The stock is volatile, but it has gained 15% year to date -- not too far off the change in the Dow Jones Industrial Average -- stabilizing after a brutal selloff at the end of 2018.
The Street remains split on GE shares. Price targets range from $5 to $15 a share. The $10 spread is far wider, as a percentage of GE's stock price, than for comparable industrial companies in the S&P 500. Tusa recommends selling GE shares. His price target is $5, the lowest on the Street and well below the shares' level of about $8.50 on Thursday.
What's new. Tusa has been bearish on GE stock for a while. He continues to believe its core operations aren't has healthy as investors hope, despite big changes made by new CEO Larry Culp. Cash flow remains his focus and he expects that the results will show that GE burned through some cash in the third quarter.
"The consensus bogey last time we checked was modestly negative free cash flow," wrote Tusa in a Thursday research report. "The point is that the lower the number for [third quarter] the higher it needs to be for [fourth quarter] which would be in line with normal seasonality in the past."
He worries that normal seasonal patterns won't play out this year. It's one reason he remains bearish on GE stock.
Dray, on the other hand, rates GE at Buy, with a price target of $13. . "GE' s turnaround may be a 'game of inches,' but we believe that [Culp's] leadership measures up to the task ahead," he wrote on Wednesday.
He is watching for how the deconsolidation of Baker Hughes, a business formerly majority owned by GE, will affect the conglomerate's financial forecasts, the results of GE's annual testing of its insurance reserves, and, like Tusa, figures on cash flow.
Besides GE, Tusa recommends investors avoid 3M (MMM) and Johnson Controls (JCI). Tusa rates 3M and Johnson Controls the equivalent of Sell and Hold, respectively.
"We are below the Street for [3M and JCI third -quarter numbers] with core growth down slightly," wrote Tusa. "Given continuingly weak end market trends we don't think standing guidance is conservative enough as it assumes acceleration in the back half."
On the other hand, he likes United Technologies (UTX), calling it a defensive stock for the current macroeconomic environment. Tusa favors the company's proposed combination with Raytheon (RTN) and rates United Tech shares at Buy.
Looking ahead. Overall, Tusa says investors should focus on what management teams have to say about tariffs, and how they are affecting earnings. The U.S.-Chinese trade war continues to weigh on investor sentiment as well as global economic growth.
The "broad-based slowdown is worth watching," he said. That sounds like a good idea for investors plotting what to do in 2020.