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GE Received Rating Upgrades from Top Research Firms

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Jan. 4 2019, Updated 10:30 a.m. ET

JPMorgan ups rating

It seems that General Electric’s (GE) newly appointed CEO Larry Culp’s quick actions on implementing restructuring plans has helped the stock gain analyst confidence. In December 2018, GE received rating upgrades from analysts at two big firms, JPMorgan’s (JPM) Stephen Tusa and Vertical Research’s Jeffrey Sprague.

On December 13, the long-time bearish analyst, Tusa, upgraded his rating on GE 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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The analyst had been bearish on GE since May 2016, raising questions about its earnings and future cash flow generation capabilities. At that time, he had also pointed out that the industrial conglomerate might cut dividends to improve its liquidity position. Over the past year, all of Tusa’s predictions about the stock have been true.

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 could help GE in gain investor confidence.

Vertical Research raises target price

GE got rating upgrade from another research firm within a week after Tusa upgraded his recommendation on the stock. On December 19, Vertical Research analyst Jeffrey Sprague upgraded his rating for the first time in ten years on the stock to “buy” from “hold” and raised the target price by $1.00 to $11.00. An institutional investor poll has awarded Sprague the top-ranked analyst several times.

In a note to clients, Sprague said GE would complete its restructuring plan, which includes exiting from Baker Hughes (BHGE), healthcare, transport, and other smaller businesses. He believes the company won’t face a severe liquidity crisis in the long run.

Sprague wrote, “While the work ahead is still hard, we think the lack of investor confidence will slowly subside.” He added, “New CEO Larry Culp has his hands full, but a talented outsider is what GE needs to fully break from the past.”

The Industrial Select Sector SPDR ETF (XLI) has allocated 4.1% of its portfolio to the stock and 5.8% in GE competitor 3M Company (MMM).

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