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General Electric Jumped ~11% on J.P. Morgan’s Rating Upgrade

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Rating upgrade

General Electric (GE) stock was trading ~11% higher during today’s pre-market trading session after J.P. Morgan (JPM) analyst Stephen Tusa upgraded his rating on the stock to “neutral” from “underweight.” In a note to clients, Tusa wrote that the struggling company’s risk-reward looks to be balanced at current levels. However, the analyst maintains his previous target price of $6.00.

Justifying his rating upgrade, Tusa wrote, “We now believe a more negative outcome on these liabilities (equity dilution is one) is at least partially discounted, and it’s possible the company can execute its way through an elongated workout that limits near-term downside.”

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Tusa has been bearish on GE since May 2016, raising questions about its earnings and future cash flow generation capabilities. At that time, he had also hinted that the company might cut dividends to improve its liquidity position. Over the past one year, all of Tusa’s predictions about the stock have been true.

Even a month earlier on November 9, Tusa cut his target price on GE by 40% to $6 from $10. At the time, Tusa argued that the company’s third-quarter 2018 quarterly results were worse than expected. He also pointed out that with rising liabilities, a weakening cash flow, a dismal EBITDA outlook, and troubled power and financial divisions, GE lacks a fundamental growth driver.

Therefore, a rating upgrade from the same analyst that has made accurate predictions in the past has seemed to help GE in gaining investors’ confidence.

Bearish sentiment

Over the last one month, analysts have turned increasingly bearish on GE after the company reported dismal results for the third quarter on October 30. The US’s largest industrial conglomerate’s revenues and earnings both significantly declined on a year-over-year basis and missed the respective Wall Street estimates as well. Additionally, GE’s forecast of missing full-year earnings and cash flow targets raised further concerns about its near-term performance.

The big three credit rating agencies—Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings—downgraded their ratings on GE after its third-quarter results. Most research companies including Credit Suisse (CS), Barclays (BCS), and Cowen and Company have drastically lowered their target price targets on the stock.

GE makes up ~4.1% of the Industrial Select Sector SPDR ETF (XLI).

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