JP Morgan's Stephen Tusa on GE's recent rally: 'The price is wrong'

Published Thu, Jan 16 20201:14 PM ESTUpdated Thu, Jan 16 20204:08 PM EST

J.P. Morgan analyst and longtime General Electric bear Stephen Tusa poured cold water on the industrial giant's recent stock run-up, saying in a note that "the price is wrong." GE shares are up more than 33% over the past three months. The company on Oct. 30 hiked its 2019 cash flow outlook and reported quarterly results that beat analyst expectations. GE said it expects its free cash flow — a closely watched efficiency gauge for companies — to range between flat and $2 billion for 2019. But Tusa, who has an underweight rating on the stock, notes the company's persisting issues with its power and aviation units warrant a lower share price for General Electric. "We view the deterioration in fundamentals at GE as reflecting structural challenges versus something more cyclical in which 'normal' is materially higher than where we are today," Tusa said in a note to clients. GE's power business struggled so much in recent years it led the company to break it up into two factions: gas products and services along with a separate unit made up of GE's steam, grid, nuclear and power conversion businesses. The power unit's troubles continued through the third quarter of 2019, with revenue falling 14% from the year earlier-period. Tusa noted those problems should continue after hearing "countless anecdotes around services price pressure." GE CEO Larry Culp has said, however, the company's power division continues to "see signs of stabilization due to better project discipline and execution." As for aviation, the business grew its revenue by 8% in the third quarter to $8.1 billion from $7.5 billion. But GE noted the division could still take a cash-flow hit from the Boeing 737 Max grounding. GE sells so-called LEAP engines to Boeing for its jet. "Time has already told, but will continue to tell, how deeply not only the supply relationship, but the business model approach truly is," Tusa said. Tusa gained recognition for his early warnings on the company. His price target of $5 per share is the lowest among Wall Street sell-side analysts and implies a 58% downside from Wednesday's close of $11.87 per share. The stock fell 0.25% $11.84 on Thursday. — CNBC's Michael Bloom contributed to this report .

A subsea oil and gas tree at the General Electric manufacturing plant in Montrose, U.K.

Simon Dawson | Bloomberg | Getty Images

J.P. Morgan analyst and longtime General Electric bear Stephen Tusa poured cold water on the industrial giant's recent stock run-up, saying in a note that "the price is wrong."

GE shares are up more than 33% over the past three months. The company on Oct. 30 hiked its 2019 cash flow outlook and reported quarterly results that beat analyst expectations. GE said it expects its free cash flow — a closely watched efficiency gauge for companies — to range between flat and $2 billion for 2019.

But Tusa, who has an underweight rating on the stock, notes the company's persisting issues with its power and aviation units warrant a lower share price for General Electric.

"We view the deterioration in fundamentals at GE as reflecting structural challenges versus something more cyclical in which 'normal' is materially higher than where we are today," Tusa said in a note to clients.