GE shares turn negative after top analyst Stephen Tusa of JP Morgan gives warning before earnings

Key Points
  • J.P. Morgan analyst Stephen Tusa said Tuesday that there is "an unfavorable risk/reward for GE stock into 4Q earnings."
  • GE shares fell more than 2 percent following the report after climbing as much as 2 percent earlier in the day.
  • Tusa gained a following for his work on GE after he became the first analyst to go negative on the stock, when it was above $30.
GE drops to session low on Tusa's negative comments

General Electric shares turned lower after widely followed analyst Stephen Tusa of J.P. Morgan put out his highly anticipated earnings preview on the company, which reports Thursday before the bell.

"We see an unfavorable risk/reward for GE stock into 4Q earnings, as the focus turns to hard data around run rate fundamentals, including near-term FCF, as well as any update on strategic de-leveraging plans to the extent they come, and the dilutive impact of such moves," wrote the analyst.

The warning should come as no surprise to those following Tusa, who said just last week that there wasn't a good reason for the comeback in GE's shares this year. Tusa gained a following for his work on GE after he became the first analyst to go negative on the one-time Dow Jones Industrial Average member in May 2016 when the stock was above $30. His reports will often move the stock and Tusa himself may have in fact helped spark the recent rebound in the shares when, in mid-December, he said that a level around $6 a share was the bottom.

Tusa said he sees two scenarios when the company reports earnings, both of which are "a negative" for the stock. If GE gives concrete updates regarding its financials, Tusa said that will "support our well below-consensus view" on the value of what's left. But if there is not "much tangible" in the report, "it will reinforce the bear case that there is no concrete silver bullet-like plan," he said.

"There are a myriad" of questions that need to be answered, Tusa said. Those topics include GE's free cash flow, the company's forecast for 2019 and the performance of GE Capital. The latter, Tusa said, could have "material operating losses."

J.P. Morgan expects GE's struggling power business "to report another loss," Tusa said, as weak demand and problems with its line of HA-Class turbines continue to put pressure on the division. For GE's health care, transportation and renewables businesses, Tusa estimates GE will report lower performances compared with the same period last year.

Tusa laid out six "key questions" GE should answer during the company's conference call:

  1. Earnings and free cash flow forecast for 2019
  2. Update to issues with the HA-Class turbines
  3. Breakdown of market share for the power and renewables businesses
  4. Explanation of headwinds facing aviation business,
  5. Update regarding federal investigations into GE's accounting practices
  6. GE Capital update, including the potential sale of GE Capital Aviation Services

GE shares closed down 0.3 percent at $8.90 a share, after falling as far as 2.9 percent in midday trading. As of Monday's close, the stock had risen more than 24 percent since Tusa upgraded his rating on the stock to neutral from underperform.

J.P. Morgan has a price target of $6 a share on GE.

– CNBC's Michael Bloom contributed to this report.