Shares of General Electric Co. surged Tuesday, extending the previous session’s sharp climb, after RBC Capital equity analyst Deane Dray turned bullish, enough so to suggest prices have hit bottom, after the company replaced its CEO with someone known for his “operating excellence.”
Credit analysts took a different view, however, as S&P Global Ratings slashed its rating on GE’s long-term debt by two notches, and Moody’s Investors Service said it might do the same, following the company’s lowered guidance.
RBC’s Deane raised his rating to outperform, after being at neutral since Nov. 14, 2017, which is when the company announced its transformation plan. He raised his stock price target to $15, which is 24% above Monday’s closing price, from $13.
The stock GE, +2.03% surged 2.4% in afternoon trade, adding to the previous session’s 7.1% surge.
On Monday, the shares rocketed as much as 16% intraday before paring gains, after the struggling industrial conglomerate said Chief Executive John Flannery was being replaced, after just 14 months in the role, by outsider and former Danaher Corp. DHR, -0.35% CEO Lawrence Culp. The stock rallied even though the announcement included a profit warning and an expected impairment charge of as much as $23 billion.
See also: GE replaces CEO and investors cheer, despite a profit warning and huge charge.
Dray said he has “deep respect” for Culp’s leadership and relentless focus on “operating excellence” and accountability. He said that while it will take time for Culp to assemble his team, triage all the problems and put his imprint on the break-up plan, but investors can have confidence in his strategic vision.
“We believe that a floor has now been put in the stock,” Dray wrote in a research note to clients. “To be clear, there is still much to fix at GE, but the market can now have full confidence in the senior leader at the helm.”
From the end of May 2001, when Culp was named CEO of Danaher, until he retired from the company on March 1, 2015, Danaher’s stock soared 454%, while GE’s stock fell 47% and the Dow Jones Industrial Average DJIA, +0.40% rose 66%.
GE’s move wasn’t such a surprise to Dray, but it did occur sooner than expected. In a note last week, he discussed the likelihood of a large impairment charge at GE Power, a cut to 2018 guidance and the prospects that Larry Culp could at some point be named CEO.
“The timing of the management change was obviously accelerated, and we applaud the board’s decisiveness,” Dray wrote.
Since Culp is GE’s first outsider to be named CEO, Dray said he wouldn’t be surprised if Culp tried to persuade his long-time chief financial officer at Danaher, Don Comas, to join him at GE.
In January, Danaher said Comas will transition to retirement and will be succeeded as CFO by Matthew McGrew, effective Jan. 1, 2019.
FactSet, MarketWatch GE credit cut at S&P, Moody’s may do the same
Credit rating agencies took a different view of GE’s announcements, with S&P Global Ratings moving quickly to slash the long-term debt rating by two notches to BBB+, which is just three notches above speculative grade, or “junk” status, from A (the rating leapfrogged the A- rating, just below A). The short-term rating was cut to A-2 from A-1, while the outlook was revised to stable from negative.
“The latest news on power performance has led us revise down our view of GE’s aggregate competitive positioning, with solid performance in aviation and health care further overshadowed by weakness in the power segment,” S&P said.
Meanwhile, Moody’s said it has launched a review of GE’s A2 long-term debt rating, which is currently five notches above junk, for a possible downgrade. Moody’s said a potential downgrade of the rating “may not be limited to one notch.”
Moody’s said it expects to address the review within the next few weeks.
Flannery not all to blame for GE’s stock plunge
GE’s stock has tumbled 51.3% since Aug. 1, 2017, when Flannery took over the CEO reins from Jeff Immelt, through Monday, while the Dow had gained 21.8%. But investors shouldn’t solely blame Flannery for the stark underpeformance.
“Outgoing CEO John Flannery served 14 months at the helm, minding a thankless interim as communicator in chief for GE’s successive disclosures of enterprise failings in financial planning and analysis, none of his making,” wrote analyst Christopher Glynn at Oppenheimer. Such a role should be interim, as by definition thrust into a spiral of negativity; Mr. Flannery may have had enough.”
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Glynn said that although Culp is “rightly lionized as a standard bearer of CEO excellence,” he kept his rating at perform, which he’s had on the stock since upgrading it from underperform on June 26, 2018.
“The GE story remains one of heavy lifting,” Glynn wrote. Rather than an emphatic endorsement that GE can rapidly pivot to a stabilized baseline--that enough shoes have dropped--we concede that Culp accepting the appointment endorses the view that the frameworks confronting GE, while real and onerous, are not fundamentally unstable past a point.”
