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Why General Electric Stock Dropped Today

By Rich Smith – Nov 18, 2021 at 4:16PM

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JP Morgan's analyst sees GE as overvalued -- but he isn't saying to sell it.

What happened

Shares of industrial giant General Electric (GE 2.58%) -- which is soon to be three industrial giants -- closed Thursday's session down by 1.3%.

You can thank JP Morgan for that.

Simple red arrow declining stock chart on a white checked background

Image source: Getty Images.

So what

In a note out Thursday morning, JP Morgan analyst Stephen Tusa warned that there's a "mechanical flaw" in the valuations that other analysts have been positing for GE stock in the wake of the conglomerate's decision to divide itself into three independent companies. Instead of the more than $116 per share that some investors were paying for GE after it made its announcement ... or the $120 a share that Wells Fargo said the stock would be worth as a sum-of-the-parts investment ... or the $131 per share that Deutsche Bank said the stock could be worth, JP Morgan thinks GE shares are probably worth only $55 each.    

How did Tusa come to this conclusion? Well, as reported Thursday, according to the JP Morgan analyst, other analysts are valuing GE's GE Capital subsidiary at $5 billion to $15 billion more than it's actually worth because there are "no readily monetize-able assets in ... GE Capital" aside from its cash and the value of its share in AerCap holdings -- and the value of AerCap is already needed to offset cash outflows for insurance claims.

This, warns Tusa, leaves GE Capital with essentially "no value" to contribute to the sum of GE's parts.

Now what

It gets worse. Apparently, misvaluing GE Capital isn't the only mistake analysts are making about GE. Earlier this week, Tusa also warned that Wall Street is overvaluing GE's big renewable energy business. Reviewing GE Renewable's portfolio of assets, the analyst finds the company's product mix and profit margins are both below average for the renewable energy industry. As such, the business unit is worth about $20 billion less than the value other analysts are ascribing to it.  

Together, these two notes from JP Morgan add up to an argument that GE is anywhere from $25 billion to $35 billion overvalued. Subtract that from the company's current $110 billion market capitalization, and it implies that the stock should be trading at least 23% below where it trades today -- and probably even lower than that.

Of course, the real question is: If this is how Tusa really feels about GE, and if the analyst is really certain of the $55 price target on GE stock, then why is he maintaining a neutral rating on a stock that he believes is overvalued by a factor of two?

Someone should probably ask the analyst about that.

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

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