GE Profit Forecast Is at Risk From Power, Finance Problems

Updated on
  • Analyst says lending unit value is zero after insurance charge
  • Manufacturer’s shares on track for sixth straight decline
Herro Says GE Was Horrifically Run for the Last Decade

General Electric Co. likely will cut its 2018 profit outlook this week as the manufacturer struggles to get a handle on deep problems across its industrial and finance operations, according to a new report.

An unexpectedly large insurance-related charge disclosed last week and the possibility of more liabilities “raise a question about the credibility of the current guidance,” Andrew Obin, an analyst at Bank of America Merrill Lynch, said Monday in a note. He downgraded the shares to neutral from buy and said the value of the lending unit to investors has been wiped out.

Besides GE Capital, the “key challenge” for the Boston-based company is flagging demand for gas power generation, Obin said. The market appears to be near a bottom, but “it will likely take a while for GE to adjust its cost structure and business model to the new reality.”

A guidance cut would extend pain for the company, which was the worst performer in the Dow Jones Industrial Average last year amid cash-flow issues and weak demand in several key markets. Chief Executive Officer John Flannery has committed to cut costs and sell assets to help turn the company around.

GE fell 1.2 percent to $16.06 at 12:11 p.m. in New York, putting it on track for a sixth straight decline. The stock on Friday closed its worst week since the recession.

Management in November projected adjusted profit of $1 to $1.07 a share for this year. Analysts currently expect earnings at the bottom of that range. Investors will be looking for a possible update to GE’s forecast on Wednesday, when the company reports fourth-quarter results.

There may be hope for GE down the road. The stock has fallen so far that it’s bound to recover even if just one factor -- such as stabilizing power markets, better cash flow or strong cost-cutting -- turns in GE’s favor, according to Melius Research analyst Scott Davis.

“It’s been since April 2008 that we’ve seen GE in a negative vortex like this,” he said in a note. “If GE can fix its problems, the upside is way more than any other story that we cover.”

(Updates with analyst comments in seventh paragraph.)
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