John Inch, Gordon Haskett senior multi-industry analyst, joins Yahoo Finances Alexis Christoforous and Brian Sozzi to discuss the latest developments around General Electric.
ALEXIS CHRISTOFOROUS: General Electric is one of the top trending tickers on the Yahoo Finance website this morning. In fact, the stock is up better than 1 and 1/2% right now after the company said it disagrees with the SEC's move to issue a Wells notice linked to some of its accounting practices.
John Inch is Gordon Haskett Senior Multi-Industry Analyst, and he joins us now. So John, why do you think the stock is rallying on this news? And how big a deal is this Wells notice for GE?
JOHN INCH: Well, the stock's up today as part of just its trading pattern. It's pretty volatile, and I don't think it means much of anything. Of course, GE was going to disagree with it. What else would it do, agree with the-- agree with the government on this front?
The Wells notice is pretty serious. We've been warning about it for a while. The SEC and Department of Justice are investigating GE and have been doing so for the better part of a couple of years. They're investigating the company's accounting practices pertaining to reserving for insurance, their communications, their long-term service agreements, and their account [AUDIO OUT]
But it is pretty serious. It's an initial precursor to them taking civil injunctive action. And you know, investors really think what will simply happen is GE will receive a fine. Well, it could be much more serious than that.
The SEC may come out and say, look, your insurance reserves are inadequate, or they may ask GE to separate out the capital that supports its insurance, which could suggest there is not enough equity capital in the rest of the financial company, which could mandate, frankly, an equity capital raise to put more money into it. And GE just doesn't have the money. So there's a whole string of things that could actually play out here that could turn out to be negatively surprising for investors.
BRIAN SOZZI: John, the big question here, what's left of GE's investor base? Do they need to be shaking in their boots with regards to a potential restatement of earnings? And where does the stock go if that-- if that breaking news hits the wires?
JOHN INCH: Well, firstly, I think this is a starting point. I don't think the company goes bankrupt. They can always issue equity capital to raise funds. Clearly, if you look at the stock price, and currently we're in a, you know, a recovery from the pandemic-driven second quarter lows, GE is lagging woefully behind. It's pretty clear that a lot of certainly long-term and intermediate-term investors have been shaken out, so there's not a lot of support for the company right now.
But there are still people buying and selling it every day, right. And so where would the stock go? I mean, it could go lower. It becomes-- when the stock gets into the single digits like this, it becomes a little bit of an undefined equation. It becomes very volatile and not necessarily an investable security for some of the large mutual fund complexes.
It's just becomes too risky to actually take a position in. A lot of things would have to shake out before GE would stabilize. And again, with the Wells notice and the SEC and DOJ investigations possibly going on for a while with other important implications, it makes it very hard for mutual funds to step up to their boards and say, look, we're buying GE given all of these risks so, you know, fasten your seat belts, it could still be volatile for a while.
BRIAN SOZZI: John, Wells notice for GE, if they receive a fine or the financials get restated, is Larry Culp's job at risk?
JOHN INCH: I don't believe so. There's really nobody else to take the job. And you got to remember, Brian, that these events happened while Larry Culp was not CEO. We're talking prior to these events. The CFO who was CFO at the time, Jamie Miller, she's gone.
There's a new CFO. The company recently announced some other internal shakeups. They've been hiring new people. No, I don't think so.
In fact, the board, actually two years in advance of the expiration of Larry Culp's pay package, strengthened it, renewed it for another five years and doubled down and restruck a lot of his options. So no, he's being paid very well with a lot of optionality to get a lot of money if, in fact, the stock gets back to sort of $10, $12, which, you know, that's a big percentage increase, but if you look at it, really is not very remarkable relative to where the stock has been historically.
ALEXIS CHRISTOFOROUS: Before we let you go, where do you see the most untapped potential for GE right now? We already know they've slimmed down their big profile over the years and under Larry Culp. But what has the most potential?
JOHN INCH: By potential, you mean to raise money or potential to unlock value or--
ALEXIS CHRISTOFOROUS: I mean to unlock value for shareholders.
JOHN INCH: Well, it's going to be tough for them when they've got such-- remember, they still have a large outsized debt [AUDIO OUT] huge pension plan under funding with interest rates short term having gone to zero. They just need to raise money. So to unlock value, you need to stabilize the financials [AUDIO OUT] not stabilized.
And if the SEC mandates that they separate out their capital for their aircraft leasing business versus the rest of the company, as I said, they're going to need to raise more money. So I think if they raise more money that clearly would help to stabilize. If they did an IPO, for instance, of their health care business, what's left of their health care business following the sale of the BioPharma business to Danaher, that could raise money.
So there's definitely other things they could do, but none of these necessarily have short or intermediate-term happy outcomes for the share price, which is, you know, continuing, we think, to remain under a lot of pressure, but be volatile. So as I say, I wouldn't look at daily trading. That's going to be noise relative to sort of how the group trades, you know, macro news, that sort of thing. Long term, I think it's still uninvestable.