GE has been 'brushing things under the rug' for decades, Deutsche Bank analyst says

  • GE has been "brushing things under the rug and leveraging aggressive accounting" for several decades, Deutsche Bank's John Inch says.
  • "One could infer the prior management basically did this to drive the … adjusted EPS up as much as possible to pay themselves as much as possible," he says.
  • Among the problems plaguing the company is a collapse in cash flow and a severely curtailed profit outlook, says Inch.

General Electric has been "brushing things under the rug and leveraging aggressive accounting" for several decades, Deutsche Bank analyst John Inch told CNBC on Thursday.

"One could infer the prior management basically did this to drive the … adjusted EPS [earnings per share] up as much as possible to pay themselves as much as possible," he said in an interview with "Power Lunch."

The Wall Street Journal reported Wednesday that former GE boss Jeff Immelt was consistently overoptimistic, projecting results for the company's future mismatched with reality.

A spokesperson for Immelt disagreed with the basis for the Journal report, telling CNBC that "the story ignores the facts and events of the past 16 years."

An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.
Sebastien Bozon | AFP | Getty Images
An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.

Inch said there are "a lot of parties that are culpable here."

"The information they provided was one-sided. They made it overly complicated to dissect the financials. They compounded the complexity on purpose so people wouldn't look at the details," he added. "Now unfortunately they're paying a bit of a price for it."

A GE spokesperson told CNBC, "Mr. Inch's assertion is factually incorrect. As we've said, we follow rigorous accounting practices, in line with GAAP guidelines. Any statement or suggestion otherwise is false and misleading."

Shares of GE have been on a downward slide, dropping 40 percent since Immelt stepped down in October.

Among the problems plaguing the company is a collapse in cash flow and a severely curtailed profit outlook, Inch said. He also thinks the dividend, which was cut in half in November, is at risk of being slashed again.

"We could be facing a multiyear power [generation industry] downturn when just less than a year ago the company was going full throttle, talking about how great everything was. And today the world looks completely different," he said.

Inch, who has a sell rating on GE and a $13 price target, also thinks the notion of a GE breakup was put out as a "deflection" from the company's "fairly serious challenges."

CNBC reported last month that the company is aiming to announce a decision on breaking up its businesses as early as this spring, according to sources. A split is likely, the sources said.

"The reality is GE cannot separate. It's on the hook to back 100 percent of GE's Capital's bonds. It has over $30 billion of underfunded liability," he said.

On top of that, the Securities and Exchange Commission is investigating the company's accounting and the Justice Department is probing GE's ownership of a subprime mortgage company it owned before the financial crisis, Inch added

"You can't just separate the company. You'd have to refinance $150 billion of bonds plus untold incalculable liability. It's just not going to work. It's a nice narrative. It's just not possible."

A spokesperson for Immelt did not immediately respond to a request for comment on Inch's remarks.

— CNBC's Michael Sheetz contributed to this report.

Disclosures: GE is an investment banking client of Deutsche Bank. Deutsche Bank and/or its affiliate(s) has received non-investment-banking-related compensation from GE within the past year.

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