Yamahama. In yesterday's RM article I quoted TheStreet.com founder Jim Cramer in stating my counterargument against his statement that oil prices are heading to $40/barrel. Today's article begins with a quote from Cosmo Kramer -- of Seinfeld fame -- instead of Jim. I uttered that word when I read the coverage of J.P. Morgan analyst Stephen Tusa's note this morning on General Electric (GE) .
Tusa reduced his price target on GE from $10 per share to $6 per share, which certainly was an attention grabber, and GE shares were trading about $8.20 in late Friday morning trading, yet another fresh 8-year low.
As someone who worked as a sell-side analyst for 11 years, I know that price targets are gimmicky attention getters that are paid little heed by professional portfolio managers. I marketed to portfolio managers on all six inhabited continents for a decade and in all those travels I was probably asked about specific individual company price targets less than 10 times.
On the other hand any analyst knows that when he or she walks into a meeting with a buy-sider the first question is always going to be about earnings estimates. That's the true value of the sell-side; to set the estimates that become the denominator in the valuation calculation.
So, I tend to focus on estimates not price targets, and Tusa's new estimates for GE are astoundingly low. He now estimates 2019 EPS for GE of $0.35 per share and his estimate for 2020 EPS is $0.41 per share. To put those numbers into perspective, GE earned $0.49 per share on an adjusted basis for the first nine months of 2018. So, they are not even going to match that interim-period level of profitability on a full year basis for at least two years according to Tusa. Yamahama, indeed.
Tusa's estimates are well the Street consensus EPS estimates for 2019 and 2020 GE EPS of $0.81 and $0.94, respectively. That's what makes his call such a strong one, and to be sure, he has been dead right on GE stock. Tusa called the continuing plunge in GE shares when other analysts upgraded this summer on an "it's too cheap not to buy" basis or a more recently on the back of the Board's sacking of John Flannery (with a nice $4 million severance payment on the way out) and naming of Larry Culp as CEO.
I certainly would not argue Culp's terrific record of value creation at Danaher (DHR) , but Tusa's call gets to the heart of the matter. As Tusa noted, "Out of the 8 reported segments, all of which were profitable even 2 years ago, 6 are now likely either at or below zero in 2020." Fix that, Larry.
And that really is the point. GE's cash flow started to turn long before the company's reported earnings started to plunge. As Tusa noted, "We are skeptical around calls for a bottom until management resets EPS expectations that are closer to free cash flow, something we believe they haven't done for almost 20 years." Ouch!
In prior RM columns I have called GE "a bad news machine with an inflated dividend," and even after the reduction in dividend payment from $0.12 per quarter to a token $0.01 quarterly payout that is still the case. This company should not be paying a dividend at all, and if there has been any good news emanating from GE headquarters in Boston in the past 12 months I surely missed it.
Tusa's strong call this morning makes it seem as if GE stock is -- to paraphrase Ralph Nader -- unsafe at any price. I am asked at least once daily "when should I buy GE shares?" and my new answer is going to be "when they are materially below Stephen Tusa's price target." That implies a $5 per share buy-in price, and that figure comes close to comprehending the incredible value destruction engineered by Jeff Immelt and accelerated by John Flannery.
I enjoy watching a dumpster fire as much as the next person, but thanks to sharp analysts like JP Morgan's Tusa I do not invest in them.