U.S. Markets open in 6 hrs 7 mins

JPMorgan Downgrades General Electric Stock

Rich Smith, The Motley Fool

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Four months ago, investment banker JPMorgan sparked a rally in General Electric (NYSE: GE) stock when it awarded the shares its first upgrade in two and a half years!

In February, JPMorgan tried to curb investors' enthusiasm with a warning that GE stock still wasn't cheap -- and indeed, could fall as much as 40% on cash flow concerns.

Today, JPMorgan seems to be doing its best to make that projection a self-fulfilling prophecy. Downgrading GE shares back to underweight this morning, the analyst appears to be pushing GE stock down 7.5% all on its own.

Five dice labeled buy and sell on top of an LCD screen displaying stock charts and numbers

Image source: Getty Images.

What JPMorgan said in December

JPMorgan upgrading GE stock to neutral came as a real shot in the arm for GE back in December.

As the analyst explained at the time, the 75% decline in GE shares over the 30 months since the analyst had begun urging investors to sell the stock had finally built GE's "known unknown" risks into the share price, making it at least theoretically possible that the stock's slide could end. The analyst posited a $6 fair value for GE stock, and while GE still wasn't quite that cheap, it was close enough that JPMorgan thought an upgrade to at least neutral was merited.

What JPMorgan is saying today

Investors, however, apparently chose to read more into JPMorgan's upgrade than the analyst had intended. Indeed, in February, they had bid GE shares up to nearly $11 -- almost twice what JPMorgan said GE was worth. Despite repeated warnings from the analyst that this was far too much to pay for GE, the stock has traded north of $10 a share for the better part of the past two months.

Today, however, JPMorgan appears to have decided that enough is enough. Arguing that investors are underestimating the risks still inherent in the equity, and "significantly over projecting" the very "small positives" contained in the stock, JPMorgan cut shares back to underweight, reports TheFly.com, and lowered its price target to $5.

As the analyst explains, GE is currently generating essentially zero free cash flow. Its power/renewables business, which accounts for 30% of GE's revenue, according to data from S&P Global Market Intelligence, "remains weak." The aviation business -- 25.5% of sales -- is "weaker than meet[s] the eye." And GE Capital (a further 7.5% of revenue) "will likely consume material cash for the foreseeable future."

New risks loom

Meanwhile, most analysts agree that GE will probably remain free-cash-flow negative this year. As for projections that FCF will turn positive next year, JPMorgan discounts this chance, warning that other analysts are overestimating the amount of cash GE might generate in future years "significantly."

Adding to the risk of owning GE stock, JPMorgan reminds investors that the company is still carrying some $95 billion in long-term debt, against less than $17 billion in cash. The analyst warns that this "high leverage" leaves GE "vulnerable to liquidity issues in the event of a recession."

Indeed, says JPMorgan, "[W]e see a real bear case in potential recession for a materially lower equity value than even our base cast PT implies, given high leverage." In other words, the fact that the analyst is cutting its price target to $5 today -- 17% below its earlier price target and about 50% below the $10 a share that GE fetched at the end of last week -- isn't even the worst of the bad news. Should last month's inverted yield curve foreshadow a recession, as many analysts believe possible, GE stock could actually sink more than 50%.

Bad as today's news sounds for GE, JPMorgan's opinion now is crystal clear: Things could get even worse.

More From The Motley Fool

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.