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GE Shares Fell 4% after Fitch Cut Its Rating to ‘Negative’

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Fitch cuts its rating on General Electric

General Electric (GE) shares fell ~4% on February 7 after Fitch cuts its outlook on the stock to “negative” from “stable.” The credit rating agency cited persistent risks associated with General Electric’s Power business and a lower cash flow expectation in 2019 as the main reasons behind its rating cut.

Fitch thinks that back-to-back quarters of declining revenues and margins in the Power segment and lower cash flow expectations for the current year show the execution risks associated with General Electric’s restructuring initiatives. The initiatives include de-leveraging and asset disposition plans.

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General Electric shares have been rising since the beginning of the year. Investors gained confidence from CEO Larry Culp’s quick actions and efforts to lower the company’s debt and improve its earnings and liquidity. In the last few weeks, Culp has undertaken several initiatives including the spin-off of the healthcare division, reducing its stake in Baker Hughes (BHGE), and revising the spin-merger terms with Wabtec. All of these initiatives are expected to generate more cash flows for General Electric. The cash flows could help the company lower its debt.

General Electric stock has risen 32.9% YTD (year-to-date) and outperformed the returns of the Industrial Select Sector SPDR ETF (XLI), Honeywell (HON), and 3M (MMM). XLI, Honeywell, and 3M have gained 13.3%, 12.1%, and 4.9%, respectively, during the same period.

Like Fitch, various research firms are also skeptical about the rally. The research firms don’t think that the rally will last long. After General Electric’s fourth-quarter results, Vertical Research’s Jeffrey Sprague said that the company’s outlook remained uncertain. He lowered the rating on the stock to “hold.”

JPMorgan Chase (JPM) analyst Stephen Tusa wasn’t impressed with General Electric’s fourth-quarter results and wanted to see the price movement in the stock. He questioned why the company didn’t provide its earnings or profit guidance for 2019. Tusa said that the Power business performed worse than expected in the fourth quarter.

Consensus rating

The analysts polled by Reuters have provided a consensus “buy” recommendation on General Electric stock. Five of the 20 analysts have a “strong buy” recommendation on the stock, five have a “buy” recommendation, eight have a “hold” recommendation, and two have a “strong sell” recommendation.

The stock’s one-year target price of $11.91 depicts a potential return of 18.4%.

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