New York (CNN Business)Wall Street seems to believe the long-awaited General Electric comeback has finally arrived. But GE’s problems are far from over.
GE is still trading in single-digits and it’s worth just a fraction of its all-time high. But the rally is built on hopes that the worst is over, and it places GE among the top 10% of all S&P 500 stocks this year. If GE were still in the Dow (it was kicked out last summer), it’d be neck-and-neck with Boeing(BA) for the top spot.
But GE’s earnings report, which is due out before the market opens Thursday, is likely to provide more evidence of how challenging it will be for Culp to pull off a speedy turnaround in a slowing economy. More difficult decisions loom as GE races to fix its debt-saddled balance sheet.
“Larry Culp’s missionis to save GE, regardless of the short-term pain,” John Inch, an analyst at Gordon Haskett, told clients in a note this week. Inch, who has long been warning of trouble at GE, has a $7 price target on the stock. GE was trading above $9 on Wednesday.
‘Show about nothing’
While analysts remain bullish on GE’s booming aviation business, they are still worried that land mines lurk at the slumping power division and the remnants of GE Capital. That’s not to mention the lingering investigations into GE’s accounting by the SEC and the Justice Department.
JPMorgan Chase analyst C. Stephen Tusa, Jr. a longtime GE bear helped spark the rally when he upgraded the stock to “neutral” last month.
But Tusa, who still has a $6 price target on GE, thinks the euphoria is overdone. In a research report published last week, Tusa likened the GE comeback to a “Seinfeld” episode, calling it a “show about nothing.”
Hopes for a GE recovery, Tusa said, have been backed by “almost no hard data or tangible new news.”
GE Capital remains a cash drain
Wall Street got very excited by reports that GE could unload its valuable aircraft leasing division. Sources told Bloomberg News that the business, viewed as a crown jewel of GE Capital, could fetch as much as $40 billion.
But Tusa believes a deal would come “well below” $40 billion and would “wipe out” all of GE Capital’s equity, which JPMorgan estimates is “already zero” because of a huge cash drain created by insurance problems.
In a report last week, Fitch Ratings noted that GE’s aircraft leasing division is built on less debt than GE Capital’s remaining businesses.
“GE Capital’s overall leverage … increases the risk it could be left with excess debt as it reduces assets further,” wrote Eric Ause, Fitch’s senior director of US corporates.
Besides GE Capital’s troubled insurance business, the finance arm has been hobbled by WMC Mortgage, a subprime mortgage unit it shuttered a decade ago.