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Top analyst Tusa says GE is 'set up to beat' earnings, but don't buy the stock yet

Key Points
  • J.P. Morgan analyst Stephen Tusa is warning investors to temper expectations for an improved forecast from General Electric.
  • Tusa is widely followed for his thoughts on GE, due to his early warnings of the stock's decline about three year ago.
  • GE is "set up to beat" the Wall Street consensus on the company's closely watch metric of industrial free cash flow, Tusa says.
Larry Culp, CEO, General Electric
Scott Mlyn | CNBC

J.P. Morgan analyst Stephen Tusa is warning investors to temper their expectations for an improved forecast from General Electric when the embattled industrial conglomerate reports second-quarter earnings on July 31.

"So far this year, 'beat and lower' has been the trend, as bulls have cut '20 FCF estimates by 30% despite the 1Q 'beat', and we encourage investors to watch Street models post the print for more cuts to the out years," Tusa said in a note Monday.

Tusa is widely followed for his thoughts on GE due to his early warnings of the stock's decline about three year ago.

He said GE is "set up to beat" the Wall Street consensus on the company's closely watch metric of industrial free cash flow — money left over after a company pays for operating expenses and capital spending. It's often used as a gauge of efficiency. GE previously gave what Tusa called an "implied guidance" that second-quarter free cash flow would be between a negative $1 billion to negative $2 billion.

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"We continue to believe that a cut to 2Q FCF of this magnitude makes little sense given most of the structural cash headwinds (restructuring, working capital solutions wind down, etc.) are 2H weighted," Tusa said.

GE's second quarter will not be "any different" than its last two quarters, Tusa said. He anticipates the second quarter will beat on free cash flow with a simultaneous cut to the company's forecast.

"We see the same dynamic here where despite a 4Q18 "beat" on FCF, the forward FCF estimate has been cut by ~30%," Tusa said.

The analyst maintained his underweight rating for the stock.

– CNBC's Michael Bloom contributed to this report.