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GE Analyst: Short Report Would Have Some Merit 2 Years Ago

Jayson Derrick

Shares of General Electric Company (NYSE: GE) plummeted Thursday after a short seller report penned by Harry Markopolos emerged that argued the company is engaged in fraud.

If the report surfaced two years ago it would have more merit, William Blair analyst Nicholas Heymann said on CNBC's "Squawk Box" Friday.

Years Late To The Market

If a short seller report emerged in 2016 or 2017, it would have been "a lot more substantive," since the company did take a $15-billion writedown charge in early 2018, Heymann said on "Squawk Box."

But a short seller report today comes at a time when GE is working with regulatory bodies, including the Securities and Exchange Commission and Department of Justice, to "go through all of their accounting," he said. 

Of particular interest to regulators is the timing of revenue recognition and the adequacy of disclosure, the analyst said. 

The Math

Even if Markopolos' findings are accurate — especially the thesis that the company requires $18.5 billion in reserves to pay claims in its insurance business — it is far from fatal to the company. The sum of unrestricted cash and revolving lines of credits minus commercial paper outstanding is north of $60 billion, Heymann said. 

Other sources of capital GE can access include the guaranteed $21.4 billion from the sale of its biopharma business and a hypothetical sale of the health care business for north of $40 billion, he said.

The company has near-term access to north of $100-billion cash to address an "$18.5-billion alleged requirement," the analyst said. 

"Like I said, if this was announced in 2016 or 2017, it would be a very different, real, substantive, kind of pulling back the covers," he said. "I don't think today — I don't think that's where we are at."

GE shares were up 8.56% at $8.68 at the time of publication Friday. 

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Latest Ratings for GE

Date Firm Action From To
Jul 2019 Downgrades Buy Neutral
Apr 2019 Downgrades Neutral Underweight
Mar 2019 Maintains Overweight Overweight

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