Top GE analyst Tusa continues 'to see downside' going into earnings report

Published Tue, Oct 29 201912:27 PM EDT

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

General Electric is set to deliver its third-quarter results on Wednesday morning but J.P. Morgan's Stephen Tusa continues to tell investors to stay away in his latest note. Widely considered the top industrials analyst, Tusa is also the most bearish on GE's stock. He gained a following in recent years, issuing warnings about the GE before its sharp stock decline a few years ago. He has warned recently that GE's recent pension freeze is a sign that "more cuts" are coming and the company's key aviation business is worth much less than most believe. J.P. Morgan's $5 price target is the lowest on Wall Street, predicting the stock will nearly be cut in half in the coming year. "We continue to see downside to consensus [free cash flow] expectations for '20 and '21, and it's the lack of lift from whatever this year may be that underpins a risk/reward that we continue to see as the most negative in the group, and we remain [underweight]," Tusa wrote. Industrial free cash flow (FCF) is a metric investors watch closely for GE. Essentially, FCF is money left over after a company pays for operating expenses and capital spending. It's often used as a gauge of efficiency. In GE's second-quarter report at the end of July, the company raised its 2019 forecast for industrial free cash flow to a range between negative and plus $1 billion, up from the previous range of negative $2 billion to flat. GE's industrial free cash flow for the second quarter was a negative $1 billion, near the higher end of what some analysts expected. While Tusa says GE's 2019 forecast is "reasonable," he pointed investors to look ahead to when the company expects to begins its turnaround in earnest. "We see the debate around the '21 normalized earnings/FCF levels, as well as the balance sheet, playing out more fully in the next 6 months, with more objective visibility, and less room for opinions around both," Tusa said. With GE shares beginning Tuesday trading at $9 a share, the stock is down more than 12% since it last reported quarterly earnings. However, GE shares are up 25% so far this year, as it began 2019 at its lowest level in a decade. – CNBC's Michael Bloom contributed to this report.

People visit the General Electric stand during the China International Import Expo (CIIE) at the National Exhibition and Convention Center on November 7, 2018 in Shanghai, China.

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General Electric is set to deliver its third-quarter results on Wednesday morning but J.P. Morgan's Stephen Tusa continues to tell investors to stay away in his latest note.