A General Electric facility in Ohio in 2015. Source: Barron's

General Electric (GE) remains one of the most polarized names in the stock market. Bulls believe the value of GE’s underlying businesses far exceeds its debt load and pension obligations. Bears believe the share price does not fully reflect the diminution of Power or its deteriorating cash flows. In October 2018, Moody’s downgraded GE’s senior unsecured debt two notches to Baa1. Moody’s referenced the adverse impact of Power’s deteriorating performance on GE’s cash flows. Moody’s also provided parameters for another potential downgrade:

Moody’s suggested another downgrade could be forthcoming if (1) GE was unable to sustain free cash flow (“FCF”)/debt at around 7% or (2) there was not a steady improvement of debt/EBITDA towards less than 3 times.

A few months ago the company sold GE Biopharma to Danaher (DHR) for an eye-popping $21 billion, or about 17x EBITDA. The transaction will allow GE to pare a sizeable chunk of its debt and improve its credit metrics. Bulls assumed GE’s debt problems would magically disappear. That may not be the case.

GE Is Running In Quicksand

GE was put on notice about Power’s performance six months ago. However, Power’s demise has continued. Its Q4 2018 revenue fell 25% Y/Y and it reported another operating loss. CEO Larry Culp recently divulged Power remained a multi-year turnaround, and he expected negative FCF for 2019, mainly due to weakness at Power. This could give the rating agencies cover to downgrade GE again. Read more:

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