Shares of General Electric Co. have outperformed their industrial peers and the broader stock market by a wide margin this year, but J.P. Morgan analyst Stephen Tusa cautioned investors into reading too much into the bounce, which he said was based on “hope” rather than any real news.
In a research note titled, “GE YTD outperformance: A show about nothing…for now,” Tusa played down any perceived positives stemming from recent reports that GE was in talks to sell its GE Capital Aviation Services (GECAS) business.
A Bloomberg report earlier this month, which suggested the jet-leasing unit could be worth as much as $40 billion, was the second report in the past six months that a deal was in the works, Tusa said.
The industrial conglomerate’s stock
rose 0.6% Thursday, paring earlier gains of as much as 2.7%. The stock has shot up 16.0% so far this year, while the SPDR Industrial Select Sector exchange-traded fund
has gained 7.4% and the S&P 500 index
has tacked on 5.4%.
“GE has continued to outperform in 2019 on hope for a recovery underpinned by almost not hard data or tangible new news (reports of a GECAS sale do not count, in our view),” Tusa wrote in a research note to clients.
Tusa caused a stir last month, after the long-time GE bear upgraded the stock to neutral, saying the risk-versus-reward profile had turned neutral. Tusa’s upgrade helped mark a bottom in the stock, as it came the day after the stock closed at 9 ½-year low of $6.71.
On Thursday, he kept his rating at neutral, but implied that didn’t mean he was bullish, as he held to his stock price target of $6, which was about 32% below current levels.
Tusa said if a deal for GECAS does come, he believes it will be “well below” $40 billion in total value, and would “wipe out” all of GE Capital Services’s equity, which he already estimates to be zero to GE shareholders on a cash basis. That makes a sale at prices around the $40 billion book value as suggested by the Bloomberg report as unrealistic.
“An apparent inability to sell after being shopped now twice in the last 6 months” as per press reports, or a sale below book value “would not only be not positive but could suggest desperation” to bring in cash at any cost, said the analyst.
Either way, the outlook for GE could become a lot clearer in the next week, as the company is scheduled to report fourth-quarter results before the Jan. 31 open.