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A change in accounting could hit General Electric's stock

Key Points
  • If GE shifts the accounting method it uses to present earnings, it could come as a "shock" to the market, Gordon Haskett analyst John Inch says.
  • But he says the change "would be a welcome relief" to investors and would build GE's credibility.
  • GE is set to report fourth quarter earnings before the bell on Thursday.
An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.
Sebastien Bozon | AFP | Getty Images

General Electric's earnings statement this week may contain a fundamental change in the way the industrial conglomerate reports its accounting, a shift one Wall Street analyst says is long overdue.

"We believe new CEO Larry Culp has every intention of establishing a (2019) guidance framework that the company can actually achieve in what we believe would be a welcome relief after years of non-credible GE guidance, perpetual exaggerations, opaque disclosure and aggressive accounting," Gordon Haskett analyst John Inch said in a note to investors Monday.

However, the move to an earnings presentation based on generally accepted accounting principles could "shock" the market, Inch said. GE's earnings presentation currently does not include restructuring charges, which are often more than $1 billion per quarter. Inch said the practice has been "helping to inflate" GE's earnings.

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"The degree to which the consensus forecast may have to come down could significantly negatively surprise the market, even though we believe investors generally expect Culp to bring down expectations," Inch said.

GE is set to report fourth quarter earnings before the bell on Thursday. Inch said the change to GAAP would be in line with the investor feedback that Culp's predecessor, John Flannery, received in the summer of 2017.

"One of the key feedback themes that Flannery repeatedly heard was for GE to establish a credible earnings 'base,'" Inch said.

Investors told Flannery to bite the bullet and "come clean," Inch said. But Flannery did not heed their advice and did not move GE's presentations to GAAP.

"A move to GAAP would at least demonstrate Culp's directional willingness to abandon the inflated and exaggerated earnings presentation practices of the past," Inch said.

With such a change, Inch estimates 2019 earnings for GE of 64 cents a share. Inch also expects GE shares would move lower if Culp makes the change, as Wall Street's consensus estimate would slip. The Street's current GE 2019 earnings consensus is 83 cents a share.

GE shares slid 2.5 percent on Monday, closing at $8.93 a share. Gordon Haskett has an underperform rating and a $7 price target on GE.