(Bloomberg) -- General Electric Co. soared as the stock’s biggest bear finally had something positive to say about the crisis-stricken manufacturer.
Steve Tusa, the JPMorgan Chase & Co. analyst who has had a sell rating on GE for more than two years, upgraded the shares to neutral Thursday as he said the “known unknowns” weighing on the balance sheet are better understood. It’s possible, he said in a note, that GE can pull off a recovery without another major stumble.
The threat of further deterioration in GE’s liabilities is “at least partially discounted, and it’s possible that the company can execute its way through an elongated workout that limits near-term downside,” Tusa said in a note to clients.
The unexpectedly upbeat sentiment sent the shares up as much as 12 percent in New York, the biggest intraday gain in a month. A separate announcement from GE about a reorganization of its digital business also buoyed the stock, which rose 7.9 percent to $7.24 a share at 12:30 p.m. The gain was welcome news for investors after a whopping 62 percent decline this year through Wednesday.
GE’s bonds also rose in early trading, with the 4.418 percent note due 2035 up more than 1 cent on the dollar to 84.768 cents, according to Trace bond-price data. That’s the highest in a month.
The Boston-based manufacturer has struggled to get its arms around problems from financial liabilities to cash-flow shortages to a slumping power market in what has become one of the most severe slumps in its 126-year history. GE ousted Chief Executive Officer John Flannery in October and appointed Larry Culp to speed up a turnaround.
The new boss took a big step Thursday as GE said it would form an independent company for its software business, allowing GE to remain focused on building core products such as jet engines and gas turbines.
The company will retain ownership of the operation, which will have its own board, a new brand and about $1.2 billion of existing software revenue, according to a statement. GE Digital’s leader, Bill Ruh, will step down “to pursue other opportunities” as part of the revamp.
The company also agreed to sell a majority stake in ServiceMax, a software provider it bought two years ago for $915 million, to technology investment firm Silver Lake. Terms of the latest deal weren’t disclosed.
The moves mark a shift from what had been a key pillar in GE’s growth strategy in recent years. Under former CEO Jeffrey Immelt, GE invested heavily to build a software business that would complement the manufacturing operations, buying businesses such as ServiceMax and Meridium Inc. and recruiting Ruh from Cisco Systems Inc. GE has developed an operating system called Predix to help run industrial equipment more reliably and efficiently.
GE Digital became an official unit in 2015, as the leaders boasted that the company could become a top 10 software provider by 2020 with as much as $15 billion of sales. Immelt even adopted the moniker “digital industrial company” to describe GE.
After Immelt stepped down last year, Flannery scaled back GE’s digital ambitions, saying it would be focused tightly on products related to GE’s industrial markets.
The company may bring on additional investors for the digital operations, but it has no plans to sell the business, according to a person familiar with the matter who asked not to be identified.
The ServiceMax deal may require balance-sheet writedowns if GE sold it for less than it originally paid, according to Gordon Haskett analyst John Inch, who rates GE the equivalent of sell. And as GE unloads other assets, the latest move is “another perhaps troubling data point supporting the notion that GE is scrambling to sell everything it can as quickly as it can” to mitigate liquidity issues, he said in a note.
GE still faces a number of challenges, including the need to reduce debt and pension liabilities, restructure the power business and improve free cash flow, JPMorgan’s Tusa said in his note, which came out prior to GE’s digital announcement. An equity capital raise would help address the leverage issues and also protect the balance sheet from a potential downturn, he said.
Still, he warned that a reset in free-cash-flow expectations may be necessary, even as it could provide a bottom for the stock.
Tusa had been a long-time bear on GE’s stock, carrying the equivalent of a sell recommendation since May 2016. He still holds the lowest price target on Wall Street at $6 a share, compared with the average $11.33, according to data compiled by Bloomberg. GE has nine analysts who rate it a buy, 13 calling it a hold and two saying sell.
The surge saved GE -- at least temporarily -- from a dismal milestone. This week, the shares briefly fell to $6.66, matching the nadir during the 2009 recession. GE hasn’t closed lower than that since 1992.
(Updates with analyst comment in 14th paragraph.)
--With assistance from Molly Smith.
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