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Could General Electric Stock Fall 40%? 1 Analyst (Still) Thinks So

By Rich Smith – Updated Apr 15, 2019 at 8:46AM

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As analysts debate GE's Q4 results, JPMorgan sticks with its $6 price target.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

General Electric (GE 1.65%) stock just won an upgrade on Wall Street. (Hurray!)

It got hit with a downgrade. (Boo!)

Which of these ratings should you pay attention to -- or should you care about either one? That's what we're here to find out.

 Bull and bear figures face off under stock arrows

Bulls battle bears over GE stock after earnings. Image source: Getty Images.

Upgrading GE stock

Let's start with the good news. Yesterday, General Electric reported its Q4 2018 financial results. Quarterly sales of $33.3 billion beat expectations, while "adjusted earnings" (the artist formerly known as pro forma) missed analyst targets by $0.05, coming in at just $0.17 per share.

Actual GAAP earnings from continuing operations were even worse -- just $0.08 per share. On the plus side, though, GE said it had "adjusted GE industrial free cash flows" of $4.9 billion, which is good news for anyone who's concerned about the company's debt load.

Responding to the news, analysts at Argus upgraded the shares to buy and raised their price target on GE to $13 yesterday afternoon. In a report covered by, Argus argues that new GE CEO Larry Culp "has put the brakes on the steady stream of bad news," and furthermore predicts that GE could earn as much as $1.50 per share once it gets its house in order.

William Blair reiterated its price target, arguing it's still "very early innings" in GE's turnaround, and predicted the stock will continue to outperform the market -- and could hit as high as $16 a share within the next six to 12 months.

Downgrading GE stock

And yet, not everyone's so sanguine about GE's chances. For example, this morning, Vertical Research Partners downgraded the stock to hold, citing uncertainty about the company's near-term prospects.

Perhaps the most important note of all coming out of Wall Street this morning, though, is the one from JPMorgan. The analyst, as you may recall, actually sparked GE's rally in December when it upgraded GE shares from sell -- for the first time in two and a half years!

At the time, JPMorgan argued that because GE's "risks," which had been "overlooked by most bulls in the past," were finally "better understood" by investors, there was less reason to fear a bad news surprise out of GE. Regardless, the analyst still didn't see GE stock as worth any more than a neutral rating...or $6 a share.

JPMorgan still thinks so today.

In today's note, the investment banker calls investors' overly positive reaction -- to GE's earnings miss, let's not forget -- a head scratcher. On the one hand, free cash flow at the company was "incrementally better" in Q4 than expected. On the other hand, though, JPMorgan warns that "simple math ... shows a negative run rate" for GE's free cash flow over the long term, which will make it difficult for the company to make much of a dent in its debt load absent sizable divestments of its core businesses.

"[O]ne has to make highly optimistic assumptions to get back to a run rate that supports anything near [GE's current share price of ] $10," warns JPMorgan. Accordingly, JPMorgan is maintaining its neutral rating and $6 price target.

But is JPMorgan right in its assessment? If GE stock is selling for north of $10 a share today, but JPMorgan says the stock is only worth $6 a share, then that would necessarily imply that investors buying GE today face the prospect of a 40% loss!

Check out the latest GE earnings call transcript.

The upshot for investors

Sad as I am to say it, I fear JPMorgan may have a point here. Consider the numbers that GE threw up yesterday:

Despite reporting positive earnings per share, and positive cash from operations in Q4, GE's GAAP earnings for last year as a whole were still negative $2.43 per share. It claimed "adjusted GE industrial free cash flows (non-GAAP)" of $4.5 billion. But the company's cash flow statement showed that cash flow was only positive $2.2 billion -- down 80% year over year -- while capital spending was $3.3 billion.

For GE as a whole, that appears to equate to negative free cash flow of $1.1 billion for the year -- the "simple math" that JPMorgan points to as showing "a negative run rate" in free cash flow. That being the case, I have to side with JPMorgan on this one: GE does not appear to be free-cash-flow positive yet, and until it is, GE stock remains a risky investment.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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