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Power Plant Woes Could Stall the GE Stock Comeback

Todd Shriber

Over the past year, General Electric (NYSE:GE) stock has endured its share of controversy. Once one of the most iconic U.S. companies, General Electric was booted from the Dow Jones Industrial Average last June, marking the first time in more than a century that GE stock was not a member of the blue-chip index.

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Then, last October, in a move aimed at further shoring up the company’s balance sheet and reducing costs, General Electric cut its dividend for the second time in 2018. Once a dependable dividend name, General Electric stock now has a paltry quarterly dividend of a penny per share.

There are times when companies ensconced in controversy rebound. General Electric stock, while not anywhere close to being all the way back, is rebounding in epic fashion in 2019 with a year-to-date gain of 41%. That is good news, but the resurgence in General Electric stock this year does not mean all the controversy is behind the embattled company.

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Earlier this week, General Electric tempered enthusiasm regarding a recovery in its power-plant business, prompting at least one analyst to speculate the company is not being entirely transparent about the goings on at that unit.

“On Wednesday, GE said its power unit will need at least three years to halt its cash hemorrhage and restore its prior cash flow to double-digit cash margins,” reports Reuters. “GE has said it expects to lose up to $2 billion in cash this year, mostly due to the power unit.”

Skepticism and GE Stock

In a note out Wednesday, JPMorgan analyst Steve Tusa displayed skepticism about GE’s ability to quickly turnaround the power-plant business while noting the company appears more committed to managing headline risk rather than improving the power-plant business.

“We see nothing here to change our negative view on Power, more so evidence of a company that appears to manage to headlines rather than on-the-ground fundamentals,” said Tusa in a note to clients.

The analyst is a noted GE bear. Last month, Tusa lowered his rating on General Electric stock to Underweight from Neutral while lowering his price target on the shares to $5 from $6. That is well below the average analyst price target of $12.76. GE stock traded just over $10 as of this writing.

While there are reasons to be concerned with GE’s power-plant business. Data from the company indicates the business is notching some growth. In the first quarter, GE’s power-plant business booked six orders for the HA-class turbines, up from zero a year earlier. That means GE landed more orders than rivals Mitsubishi Hitachi Power Systems and Siemens AG.

On the other hand, there are potential long-term risks in the gas-powered turbine business for any company with exposure to this industry because prices for alternative energy are declining, making cheaper and cleaner solar and wind more attractive to utility providers.

The Bottom Line on GE Stock

The power-plant unit is not the only potential risk to General Electric stock. GE’s effort to sell its biopharma business to rival conglomerate Danaher Corp. (NYSE:DHR) is in jeopardy and that is significant because GE is expecting to land $20 billion in much needed cash for that sale.

Weakness in the life sciences market could see the deal price trimmed or scrapped altogether, according to one analyst.

Much of GE’s efforts to bolster its balance sheet revolve around asset sales, so if the sale to Danaher fails, GE probably spins off the life sciences unit via an initial public offering.

With General Electric stock up 41% this, controversy surrounding the power plant and no guarantees on asset sales, a case can be made that a lot of good news is already baked into the shares and near-term upside from current levels could be limited.

Todd Shriber does not own any of the aforementioned securities.

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