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GE’s Wake Up Call

You’ve all seen the movies. Dark, quiet barracks. As the lights go on, a somewhat belligerent, dressed for a parade Drill Instructor comes barreling into the squad-bay banging a garbage can. The reality is a bit harsher than the movies, but you get the idea. The movie version though… That’s kind of like the feeling I get every time there’s news released regarding General Electric (GE) . What now? A long run? Road march in full battle rattle? Pugil sticks? Oh, just more news. Will the stock react? Traders are tired. Tired of this. Tired of the whole darned thing. Still, not one amongst us wants to miss the move. The move? Yes. The move that every trader with a P/L expects will finally come after CEO Larry Culp actually accomplishes his mission. He is honest, and that is good. He has a track record that is also good. Victory? Victory will likely have to wait.

I Sold My GE Long Today

Yup. Used the pop on this morning’s news to get out of my smallish long position close to a wash. As many of you do play this game, let’s talk about that. The outlook for 2019 adjusted earnings per share is disappointing at a range of $0.50 to $0.60. Our industry had been more in the $0.65 to $0.70 range. For the record, the industry has been wrong a lot on GE. In our industry’s defense, the cause for past inaccuracies has been in part due to the firm’s own past lack of transparency. At least, under the leadership of Larry Culp, facts are becoming far more visible to the public.

The earth shattering news revealed over the past few hours is in the expectation for Industrial Free Cash Flow. That all important item, already expected to post in the negative now looks to print somewhere between -$2 billion to $0 billion. That’s right. The high end of this projection is no free cash flow at all. The shock is the low end which is admittedly worse than anyone thought possible. That primarily provoked today‘s sale for this trader. We all know what is important to the firm moving forward. The firm’s goals remain an expansion in margin, an improvement in GE Capital’s debt to equity ratio and, of course, a single A debt rating.

There is some help. Aviation is a positive. Healthcare is also a positive. Power has fallen off of the map as both gas and steam turbines become less in demand as the economy evolves. Liabilities are mountainous. The sale of the bio-pharma unit to Danaher (DHR) was a big plus, as the firm raises much needed cash. Still, the Power unit is going to hurt some more before it starts to help. Culp sees that unit not being able to turn in a positive performance in terms of cash flow until 2021, but expects the firm overall to do so by 2020.

Stephen Tusa

The one name to watch, as much as Larry Culp when thinking about GE, is the JP Morgan analyst who has rarely if ever been wrong covering this name. His words on Tuesday outweigh for me to some degree anything said this (Thursday) morning. Tusa referred to the math as challenging. Tusa states that Aviation is “not as strong as many assume.” Tusa sees GE Capital as a cash sponge. My words, not his, but that’s what my mind sees. Tusa’s price target has been $6 for a while now. As the share price approached that level back in December, he admittedly saw a better risk/reward proposition for the shares. He was right then too. At these levels, he seems far less gentle.

Am I Flat GE?

Not exactly. I remain long a substantial number of calls at several strike prices going out toward this October and this coming January at steep inflated strike prices. Why? Ever hear the term “a dime a dozen”? Well, at that price I could take a profit. Will I venture back into the equity? Yes. eventually. Either at $7, or at $12, but not right here. Get my drift?

(Danaher is a holding in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DHR? Learn more now.)

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