(Bloomberg Opinion) -- In what has become something of a trend, General Electric Co. is having a very bad day.
Shares of the troubled industrial conglomerate dropped below the $9 threshold on Friday and at one point had plummeted more than 10 percent to trade at a mere $8.15. GE shares have now declined in eight of the nine sessions since its disastrous third-quarter earnings update. The much-need cash influx promised by GE’s slashing of its dividend was overshadowed by the operating loss and cash-flow woes in its challenged power unit; wishy-washiness on its leverage reduction target; and the disclosure of an expanded SEC investigation into its accounting practices that’s now also drawn the attention of the Justice Department.
If you bought GE stock on Sept. 7, 2001, the day Jeff Immelt succeeded Jack Welch as CEO and chairman, Friday’s slump would have brought a total return including dividends of about negative 63 percent, according to data compiled by Bloomberg. The S&P 500 Index is up about 260 percent over the same period, while a basket of industrial companies is up more than 275 percent. Immelt stepped down in August of last year, handing the baton to John Flannery, who lasted just 14 months before he was replaced by former Danaher Corp. CEO Larry Culp in October. So far it’s not clear that Culp has any better ideas than Flannery did for how to accelerate GE’s turnaround.
The trigger for Friday’s stock decline was a negative report from JPMorgan Chase & Co. analyst Steve Tusa, who lowered his price target on GE to a mere $6. If he’s right — and his track record on GE suggests he most likely is — then that would put the stock at levels last seen in the early 1990s. Put another way, GE could fall even lower than it did in the throes of the financial crisis when it was forced to go hat-in-hand to Warren Buffett seeking a bailout. Tusa says that’s not even a worst-case scenario and that he can envision the stock below $5.
I’ve noticed that the biggest drops for GE come after investors have allowed themselves to be optimistic and to think the company might finally be nearing a bottom. An example of this happened in May when Flannery proclaimed there was no “quick fix” for GE’s problems at a conference where many analysts expected him to lay out a more detailed turnaround strategy. Part of the reason GE’s shares fell so hard after the third-quarter earnings report is that they jumped 21 percent in one week on news of Culp’s appointment as investors bet he could be the company’s savior.
GE is still in freefall because there are still no answers to the many and growing questions about the company’s earnings and free-cash-flow prospects and the size of its liabilities. The risks Tusa highlights in his report on the power unit and the potential for an equity hole at GE Capital shouldn’t be news to investors, even if he has a more pessimistic view of them than before. He may end up being too negative, but until there’s a firm reset of GE’s financials including a move closer to GAAP reporting, that’s tough to prove. Yes, GE’s financial statements are audited, but it’s hard to have a lot of faith in a company that in one year has reported a surprise $15 billion reserve shortfall in a legacy insurance business and a $22 billion writedown on a power goodwill balance it signed off on only a quarter earlier. Shareholder lawsuits and the regulatory investigations loom.
In the meantime, the steady drip of bad news has been like Chinese water torture for anyone brave enough to bet on a turning point. Even if GE does figure itself out — and I think it might, with the help of some creative M&A — it’s going to take a lot of time and pain. Until there are answers and signs of progress, optimism seems to be a luxury investors can ill afford.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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