General Electric's (GE) shares have fallen by double digits over the past two days. The stock fell sharply mid-day Tuesday, seemingly out of nowhere. GE CEO Larry Culp spoke Tuesday at the JPMorgan Aviation, Transportation & Industrials Conference. Culp divulged to analyst Stephen Tusa that GE's 2019 cash flow would be negative due to weakness in its core Power segment:
"This is a multiyear turnaround in power," Culp said. "I don't want to sugarcoat that in any way, shape or form."
GE also sees organic revenue increasing in the low-to-middle single digits in 2019.
Several media sources credited Culp's interview with Tusa for the sell-off. Investors knew Power's 2019 cash flow would be weak, but Culp's admission that cash flow would be negative caught several investors unaware.
According to the GE investor relations webpage, Culp's conversation was supposed to start Tuesday at 1 PM.
- Near the 10 minute mark of the webcast Culp spoke specifically about the issues surrounding Power.
- Near the 12 minute mark Culp discussed the billions in losses Power suffered last year. He also admitted negative free cash flow ("FCF") will continue in 2019.
Assuming Culp's conversation with Tusa started at exactly 1 PM then his comments on Power's negative cash flow came between 1:12PM and 1:14PM. The following chart illustrates the timeline for the sharp fall-off in GE's stock Tuesday.
Was the initial sell-off caused by Culp's conversation with Tusa or something else? The Seeking Alpha article, General Electric: Is A Dilutive Event Next?, (1) parsed through the company's recent shelf registration, allowing it to raise debt, preferred stock, common stock and/or warrants, and (2) the potential dilutive effects of raising additional capital. The article was published Tuesday at 12:22PM - GE sold off shortly thereafter.
A commenter suggested details from the article triggered the sell-off:
Commenter: Shock Exchange is spreading rumors again. Did he send prices tumbling with his nonsense?
What investors believe was the catalyst for the sell-off could have implications for where the stock is headed next.
What's Next For GE?
GE has been hiving off assets to pare its debt load. The upside from asset sales may be priced into the shares already. I believe the following issues and/or events could impact GE going forward.
Scrutiny Over Power
Fitch rates GE's debt at BBB+ or lower medium grade. This also is two notches above junk status. The rating agency recently revised GE's credit to "Negative" from "Stable." It also cited concerns over risks to the Power, FCF and capital needs at GE Capital ("GECC"). Asset sales have helped pare debt and caused the stock to bounce about 35% above its 52-week low. However, the company still has $110 billion of debt outstanding and Power remains in disarray.
Power's Q4 2018 revenue fell 25% Y/Y and it generated a pretax loss. Its full-year 2018 FCF was -$2.7 billion. At some point the rating agencies could determine Power's demise and GECC's cash burn could outweigh the benefits of asset sales. That said, the performance of Power over the next few quarters could determine the direction of the stock. If the segment continues to bleed cash - which appears to be the case - then GE's sell-off could continue.
Angst Over Another Ratings Downgrade
Each of the major rating agencies rate GE's debt a few notches above junk status. Moody's intimated it wants (1) GE to sustain FCF/debt of around 7% and (2) an improvement of debt/EBITDA toward less than 3x. I previously estimated GE's debt/EBITDA was at 7x. Management has known about the rating agencies' concerns for months now. After talks of asset sales, changes in strategy and improved liquidity, Power's cash flow is still negative and GE's debt/EBITDA remains challenged.
While GE's core business underperforms, bulls continue to speculate in the stock. It appears as if bulls and certain analysts believe the company's grace period to meet the metrics set by rating agencies will last in perpetuity. In my opinion, a ratings downgrade to junk status could not only amplify GE's funding costs, but it could cause short-term creditors to run for cover. At year-end 2018 GE had short-term debt of $13 billion and accounts payable and short-term liabilities of more than $50 billion. If the company's debt was downgraded to junk then these short-term creditors could potentially ask for their credit to be repaid immediately, causing liquidity strain. I remain miffed why the rating agencies have not downgraded GE already. Questions over if or when another downgrade happens could hurt sentiment for the stock.
GE Outlook March 14
Culp is expected to give an outlook on the company to analysts and investors Thursday, March 14. Culp intimated he would give more details of Power's restructuring efforts and long-term care obligations, among other things. Power, GECC, pensions, and long-term care obligations have been discussed before. However, Culp has yet to address the rationale behind GE's recent shelf registration. Whether analysts ask Culp about the shelf registration and how he addresses such a question could drive the stock lower. GE's capital needs could be the most-important issue discussed next week.
Is a dilutive event next? We could find out next week. Sell GE.
Disclosure: I am/we are short GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.