General Electric’s stock is acting right now like the banks did at the height of the 2008 financial crisis — completely disregarding any soothing words from those in the know.
And that should frighten GE (GE) executives like new CEO Larry Culp who are trying to calm the nerves of many burned retail and institutional investors. If the stock’s slide continues, Culp may find himself looking at higher credit costs for GE and lower valuations on potential assets being marked for sale.
Not good for the struggling industrial powerhouse.
Shares of the fallen industrial giant have tanked 10% over the course of two days as Wall Street grows increasingly concerned about GE’s sky high debt levels, weakening fundamentals and pressured liquidity position.
“While liquidity is certainly debatable, we believe this is not really about liquidity, it’s about a deterioration in run rate fundamentals,” said JPMorgan analyst Stephen Tusa in a note on Friday. Tusa cut his price target to $6 from $10 and pretty much suggested GE is insolvent.
“Some sell-side bulls now point to “liquidity concerns” as the driver of share price weakness, though this misconstrues the Real Bear Case (RBC) — namely $100 billion in liabilities and zero enterprise free cash flow even after a 95% dividend cut,” Tusa said. GE’s market cap is about $69 billion, well below Tusa’s math of $100 billion in liabilities.
Shares finished Friday’s session down 6%. That’s despite GE taking a crack at under-cutting Tusa’s analysis.
“GE is a fundamentally strong company with a sound liquidity position. We are taking aggressive action to strengthen our balance sheet through accelerated deleveraging and positioning our businesses for success,” a GE spokesperson told Yahoo Finance via email.
The selloff persists
GE being a “fundamentally strong” company is certainly up for debate. The company’s adjusted industrial segment profit margin fell 180 basis points from the prior year in the third quarter. Industrial segment free cash flow declined 5% to $1.0 billion. The company’s power business continues to be a disaster — orders and sales for the segment plunged 18% and 33%, respectively, in the third quarter.
Out of GE’s seven business segments (excluding GE Capital), only aviation saw orders rise from the prior year in the third quarter. GE ended the quarter with $115 billion in liabilities alongside $62 billion in cash.
Culp slashed GE’s dividend to a penny from 12 cents in a bid to preserve $3.9 billion in cash a year. The company also points to having $40 billion in committed credit lines in place.
The pain for GE persisted into Monday though, even as Culp did his best to calm the market. Culp once again promised to bring down GE’s debt levels by selling off assets in an interview with CNBC. Former GE CEO John Flannery already put in motion a plan for GE to spin-off its health care business and exit its tie-up with oilfield services player Baker Hughes.
In other words, this was viewed as a reiteration of old news by a nervous GE investor base.
But Culp’s comment on feeling the “urgency” to reduce debt likely spooked investors further. By suggesting there is an urgency, Culp signaled concerns on GE’s cash flow outlook.
GE’s shares fell about 6% in early afternoon trading.
GE was unable to make Culp available for an interview.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi