TheChek News Flow

North America Equity Research		07 September 2017
General Electric Co. (GE US) Preparing For The Fall: It's Worse Than We Think.		Underweight Price: $24.92 06 Sep 2017 Price Target: $22.00 PT End Date: 31 Dec 2017

Revisiting GE with a keen eye on what promises to be a busy Fall, we remain negative with a PT of $22 derived from $24 that we view now as a ceiling as opposed to a floor prior, with something in the high teens as an “investable fair value”. While visibility is low, we see downside risk to our well below consensus estimates, to which the Street is approaching slowly. Details are below in this note where we provide a brief update of where we stand on the key issues, highlighted by more color on the potential magnitude of what we have viewed as a potential EPS reset. To be clear this is a reset to a lower number off of which future growth is uncertain and realistically below average, different from a “kitchen sink” which implies a base that is unrealistically depressed and can snap back. The move lower is an adjustment to reality, not cyclical, with downside risk to our already below consensus numbers, driven by structural weakness in Power, a less than expected bounce in Oil & Gas and Transportation, and more of a GAAP approach to reported numbers including lower LTSA/contract asset gains due in part to the rev rec accounting change, all of GE Cap continuing ops, and all pension costs (which makes sense given the enormity of the pension underfunding). Ultimately, we expect the company to migrate consensus closer to cash EPS and, importantly, do not view this level of FCF as depressed (see below). The mosaic here essentially validates our thesis in direction but the magnitude is worse than we have been assuming.

We also expect an update along several key fronts on the new CEO’s agenda including (1) restructuring / cost takeout (higher near-term costs, with paybacks likely longer and ~$2B+ of which will already be embedded in the reset number), (2) the portfolio evaluation (not expecting anything big currently, but asset sales needed to fund the dividend), and (3) capital allocation (dividend safe for now, but only with dilutive asset sales, and share repurchase will be dialed back as GECS dividend moves lower). With limited potential for a snapback, challenged end market exposures (fossil power / oil & gas), likely still below average FCF conversion (even after the reset), and below average portfolio optionality, including a dividend at risk of cut in a tougher macro environment and funded in the near term by asset sales, we don’t think GE deserves a premium valuation (i.e., a high multiple on “trough EPS”).

Lastly, relative reversionists are constantly trying to bottom fish based only on price performance. The fact is that, outside of maybe Tyco in the late 90s, we have never seen a large cap narrative go from “a $2+” to “something ~$1 with a risky dividend” which alone validates more than the ~3,500bps of underperformance since June of 2016. Many are worried about a short squeeze, but a key consideration is the ownership structure at this stage. Many, for 15 years, have been saying that GE is Underweighted by active institutions, though with such a heavy retail/passive base, and as per performance for those past 15 years, we don’t think this matters. What does matter is technically where consensus estimates are headed and as painful as the move has been from $2 to $1.70, $1.70 to $1.30 is a whole other level, which combined with a high payout ratio is bound to catch the attention of the machines/headlines. In other words, we think this may be out of the hands of active management. Bottom line, with risk to the earnings base there is risk to our $22 PT and we view statements by those who have had little conviction to make a call (or have made several “maybe now” calls in the past year) that we are close enough to a bottom for long term money to “re-engage” as once again premature.

·   Upcoming events into Fall highlighted by mid-Nov CEO update. The next big event will be 3Q earnings in mid-October, followed by a state of the union from the new CEO in mid-November (we think this will take the place of the annual outlook meeting normally held in December), and then perhaps an accounting teach-in to provide additional perspective for investors on things like LTSAs/contract assets, and the impact on earnings and cash flow over time. The CEO event is the most highly anticipated, at which we expect to hear his vision for the company, which will include a discussion on 2018, as well as commentary on the portfolio.

·   Downside risk to our below consensus ests, with negative trend exiting 2H17: this is a “reset to reality” not a “kitchen sink”. Our standing model assumes EPS of $1.53/$1.50 in 2017/18, and a GAAP est of $1.30 with FCF/sh of $0.95 ($0.83 Industrial) for 2018, and while we are not changing numbers, we see downside risks to both years. For 2017, we see risk to 2H guidance at Power in particular (~$300-400mm risk to our ests), which combined with possibly more restructuring (magnitude TBD) and fewer gains (Industrial Solutions likely moving to 1Q18) points to ~$1B risk to our profit estimates and ~$0.10 to our reported EPS estimate which is already below standing management guidance of low-end of $1.60-1.70 in EPS. As noted, we wouldn’t be surprised if the new CEO executes more restructuring than planned, despite the gain from Industrial Solutions likely moving to 1Q18 (~$0.3B expected, which could also be lower now) – the Water divestiture is still planned to close in 3Q. We think GE is considering a move to GAAP EPS (including all of GE Cap continuing ops, and non-service pension costs), as investor meetings pointed to a desire for reported numbers to more closely match cash earnings, with a reset that provides an ability to grow, albeit later towards the end of the decade. Fundamentally we see continued risks in Power, and with oil still hovering in the $45-50 range the recovery at BHGE should underwhelm vs expectations, while Transportation will likely remain sluggish. Renewables should grow, albeit with a slower growth profile likely than in 2017 (see below). We also believe the rev rec accounting change could end up being more than the $0.05 headwind alluded to in the 10K, part of an approach to move book earnings closer to cash earnings. On the positive side of the ledger, Aviation and Healthcare remain solid. Ultimately, while not changing our ests today, we see a downside scenario to around 2018 GAAP in the ~$1.15-1.20 range as a potential starting point, compared to current consensus of ~$1.70, which is already down materially over the past year from the $2 bogey set by management, and conspicuously lower than the $1.89 heading into the 2Q print. We scratch our heads as to the magnitude of such cuts after the company “reaffirmed the framework” in 2Q. In addition, with a potentially lower base for ’18 by a magnitude of ~$0.10-0.15, our ~$1.50 2020 GAAP number is also at risk by a similar degree.

·   No inflection in cash, current levels are a run rate, not “depressed”. We remain ~$0.5B below the low end of the ~$12B guide for Ind CFOA while looking ahead to 2018 there is no inflection, with a situation that remains tight on cash, as per no available FCF after the dividend. In other words, the cash profile is what it is, meaning any expectations for a material upward inflection are misplaced. On the simple math, we believe a good run rate to think about is Industrial CFOA of ~$12B ex-pension, with uses including capex of ~$3B and ~$1.7B for pension funding, the net of which is ~$7.3B of Industrial FCF. This is before ~$0.5B of ongoing cash expected to come from GE Capital, so just under $8B of available cash in total, prior to paying the $8+B dividend to common shareholders ($0.96/sh), and any other outflows for “other investing activities” which have averaged $1-2B over the past several years. On the cash calls, we think the GE dividend will remain intact for now (see below), pension contributions are expected to remain at the $2B level for the next five years, and management believes cash outflows for “other investing activities” will trend down over time as they reduce investment in JVs, and cut back on software spending (moved it to capex). While management believes they have cash to pay the dividend and they are not cutting it, we think the buyback is fungible, with risk that goes beyond just the timing of the Industrial Solutions divestiture, including (but not limited to) the outcome of the Insurance asset evaluation. They are not considering a stock contribution for the pension plan, but could raise debt to fund it. The analysis below shows current levels of FCF are less about cyclical drags that will snap back to historical levels or normal operational items faced at other companies, but the highly unique impact of dilutive asset sales (GECS and NBCU) and low cash generating acquisitions (we calc ~$7B in lower available FCF vs 2012 levels from major M&A moves). In fact for GECS, versus the initial $35B in presented value from the asset sales, taking into account the $2B shortfall in cash, $7B in pension overhang and $1-2B in assumed insurance evaluation capital requirement, the actual value is more like $24-25B, or $44-45B including SYF, brought in for an asset that contributed around $6B in dividends in its final few years.

 

Table 1: Portfolio moves since 2012 have been heavily dilutive to Available FCF Post Dividends

$ billion

Industrial CFOA 2012 ex-restructuring/pension contributions	12.0
GECS Dividend to Parent	6.3
Total CFOA ex-restructuring/pension contributions	18.3
Capex + other investing activities	(4.5)
Available FCF for div/buyback/M&A (a)	13.8
Dividend	(7.2)
Available FCF for cap allocation 2012 (d)	6.6
Major Divestitures (estimated 2012 cash flow):
NBCU (49% stake) JPMe	(1.0)
GECS Diff in Current Run-rate Div vs Prior	(5.3)
Lighting	(0.2)
Appliance	(0.4)
Water + Industrial Solutions	(0.3)
Total FCF loss from Major Divestitures since 2012 (b)	(7.2)
Major Acquisitions (estimated incremental cash flow):
Incremental Oil & Gas Acquisitions	0.4
Incremental Alstom (Assume 50% conversion normalized)	0.8
Total FCF gained from Major Acquisitions since 2012 (c)	1.2
New Available FCF From Just M&A Impacts (a + b + c)	7.8
Dividend 2020	(8.3)
Available FCF for cap allocation (e)	(0.5)
Diff in available FCF in 2020 for cap allocation vs 2010 (e-d)	(7.1)

Source: Company reports and J.P. Morgan estimates.

Table 2: Change in core cash fundamentals ex-gains/restructuring/major (from above) acq/div

$ billion

Operating Fundamentals ex-major acq/div	(EBIT Change 2012-2020E)
Power ex-major acq/div	(1.1)
Renewables ex-major acq/div	(0.0)
EC/Other ex-major acq/div	0.3
Oil & Gas ex-major acq/div	(0.8)
Aviation	3.4
Healthcare	1.0
Transportation	(0.3)
Core Corporate Costs	0.9
LTSA Gains 2012-2020	(2.6)
Change in EBIT ex-restr/gains/LTSA gains	0.8

Source: Company reports and J.P. Morgan estimates.

·   Not cutting the dividend but asset sales likely needed to fund dividend in the near term; high DPO however remains a real risk in tougher capital markets conditions/recession. The message from the company is that it is not cutting the dividend. Based on our standing FCF estimates and estimates for outflow from investing activities, GE is already below breakeven when it comes to funding the dividend with ongoing FCF, with compounding risk if fundamentals come in worse than expectations (as per above bullets). Our sense is that GE will sell assets to plug the near-term hole. Hypothetically, assuming Transport is up for sale along with additional non-core/low cash margin assets in EC/Renewables (potentially up to ~10% of overall GE sales), as we highlighted in our note from June, we see potential for ~$13-14B in proceeds (at ~6-8x EBITDA multiples). With some of this redeployed into cash generating M&A, this would still ultimately dilute FCF by ~$1-1.5B annually or ~$0.15/share, in order to keep the dividend breakeven with available FCF/share through 2020. Lastly, the above analysis assumes capital markets/asset sales potential remain open and businesses don’t see further macro related downside in their cash, an event for which the dividend is highly vulnerable, meaning GE is not a safety stock.

Table 3: FCF/Share Dilution from portfolio moves to fund dividend

	2018E	2019E	2020E
Standing FCF (includes Lighting Divestiture)	9.3	9.8	11.0
Other Investing outflow	(1.2)	(1.2)	(1.2)
Available FCF JPM Definition (a)	8.1	8.6	9.8
Dividend	(8.3)	(8.3)	(8.3)
Available FCF for cap deployment	(0.2)	0.3	1.5
Potential Divestitures/Acquisitions:
Transportation (90% CFOA conversion - $100mm capex)	(0.5)	(0.5)	(0.5)
10% of sales (EC/Hydro, 5% FCF/sales)	(0.6)	(0.6)	(0.6)
Cash restructuring needed	(0.8)	(0.8)	(0.8)
Potential Acquisitions	0.6	0.6	0.6
Net Impact on FCF (b)	(1.2)	(1.2)	(1.3)
FCF/Share Dilution	($0.14)	($0.14)	($0.14)
New Available FCF (a + b)	6.9	7.4	8.6
Dividend	(8.3)	(8.3)	(8.3)
New available FCF for cap deployment	(1.4)	(0.9)	0.3
Cumulative (2018-2020)	(2.1)
Net Proceeds from M&A in order to maintain breakeven	2.1
Transportation (9x, 25% EBITDA margin)	5.8
Other Asset sales (6x, 10% EBITDA margin)	6.6
Lighting	1.0
Acquisitions	(11.4)

Source: Company reports and J.P. Morgan estimates.

·   Cost out remains a focus, with some potential, but margins already look close to entitlement. As expected, GE is looking at more meaningful cuts to corporate staff, as well as other parts of the company that do not produce revenue or profit, according to a recent Reuters article, something that does not come as a surprise. This likely indicates it is moving beyond the already targeted $2B structural cost reduction by the end of 2018, something likely to be viewed as material. Our read is these moves could be headcount heavy and also include charges required on business exits, requiring substantial upfront investment / cash restructuring, with paybacks that are likely years down the road and some risk of the continuing practice that some of the “charges” are merely clean up and write-downs. While additional cost reduction would be positive, it’s important to keep in mind that little of this year’s cost out is reading through to results, as per the above (e.g., despite ~$0.6B in y/y structural cost reduction in 2Q, operating profits were flat y/y). Additionally, the “reset” number for 2018 already would conceivably reflect the $2B run rate, showing this is far from a silver bullet and does not necessarily represent “growth”. Additionally, standing margins well above peers goes against the notion that there is major fat to cut here.

Figure 1: GE Margins vs Peers (2016)

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Source: Company reports and J.P. Morgan estimates.

·   Digital challenged, cost out here is not a silver bullet and falling short of customer outcome expectations is an expensive risk. Press reports over the past week suggest the development of Digital is challenged, highlighting hiccups with Predix, a reason for a two month “time-out” in the Spring, with ongoing issues related to among other things adapting the software to legacy machine coding languages, resulting in time-consuming customer setups. Issues with the technology probably means less cost can be cut here without putting the customer experience at risk. This is all despite another $0.7B y/y in spending growth dialed in for this year, something the company says should moderate going forward (and could be underspent this year), a ~$2B cost bucket that is not going to zero but should level off. Ultimately, we think cost here should be scaled back, but we have agreed all along that this initiative has some value in the form of the next level of customer engagement, we have disagreed about the value of such outcomes to GE shareholders and view the company as having to still be committed to a material degree so as to not damage the core franchise.

·   Portfolio review ongoing, decision timing likely after CEO presentation. It’s unclear whether the news in November will include any formal announcements on portfolio change, or just some high level color on what the new CEO sees as a good/bad business, though the message here is that Power and Aviation are core (i.e., “nothing big”). This could ultimately change, but our sense is that asset sales will be more minor, with management considering most of EC + Lighting, some smaller businesses within larger segments that most people have never heard of, and maybe Transportation as the largest candidate from a segment perspective.

·   Power a moving target to the downside, segment profits likely down in 2018, AGPs risk of a cliff event. Issues continue to emerge here, with visibility tough given the combination of energy efficiency, renewables, and storage, and we see risk on gas turbines, AGPs, and growth in the core services business and expect the segment to be down in 2018 from a lowered base in 2017. On gas turbines, while the company appears to be on track for 85-95 orders this year, the industry remains tough, and this compares to 100-105 shipments expected in 2017, showing the trajectory will likely be negative for 2018 (see below for example of resource mix suggested by recent Colorado plan, with 1,700 MWs of renewables V 700 of gas). Despite lower units, management still thinks it can grow MW sales, meaning more H turbines in the mix though it is our understanding now that more H-frames means a lower contribution margin, for reasons that are unclear. In the end, pricing and low margin content mean profits will be more challenged than sales. Gas Power Systems management will be at a competitor conference today where we expect to hear more. On AGPs, we believe this key source of growth since 2012 could be peaking now, with the 20-30 units described as “at risk” of slipping out of 4Q a sign that the sale to the end customer is getting tougher, though confidence is low that these units make it into 2018 numbers. Since newer AGPs have longer paybacks for utilities, they are priced accordingly (we think perhaps materially versus the value of prior units), another risk, while capacity payments from grid operators needed to fund AGP purchases are also down. Putting it together, we think the ~$2B+ high margin AGP business could face a cliff event next year, below our current model which assumes ~150 and the 155-165 guidance for 2017 (JPMe 137). Lastly on Power Services (ex-AGPs), the environment remains in flux, and we continue to think commentary on extended outages, some enabled by AGPs which are now peaking, and lower installed base utilization, the first signs of peak, set to get worse, threatens the multi-billion dollar profit pool here.

·   Renewables should grow, but slower than recent years. While our 2017 estimates here are probably doable (profits should improve in 2H as they move down the learning curve with more 3.0s shipped), we see downside to our 2018 forecast calling for another year of 30+% profit growth which reflects margin improvement on Alstom synergies. Despite overall industry growth as renewables take an increased share of global power gen installs (note recent plan from Xcel Energy for early retirement of Colorado coal plants, replaced by 1000MW of wind, 700MW of solar, and up to 700MW of gas and/or storage), pricing pressure remains intense, in part due to the fragmented global industry landscape. As a for instance, press reports last week indicated that Saudi Arabia as part of round one of its National Renewable Energy Program (NREP) that targets 9.5GW of renewable energy by 2023, said it had qualified 25 companies for the 400MW Dumat Al Jandal wind project, with bidding for the project set to close in January 2018. Additionally, worth noting, we think the value of the PTC could be lower in the event of US tax reform, which would put some pressure on orders. Bottom line is that despite industry growth, there are reasons not to extrapolate recent profit growth trends forward here, and we see risk to our standing estimates.

·   BHGE update: limited news but tone negative, reaffirming our view of downside near term with protracted growth long term. Recent comments from management at an investor conference, where there was no public Q&A and almost no official update to numbers presented when announced last Fall, reaffirmed our cautious view. At a high level, the event sounded like a typical one from the former GE management, focused on ambiguous examples of customer experience with little hard numbers and an unusually ambiguous comment on their expectations for the market with somewhat of a reference to how that relates to the consensus earnings expectations. With adjusted numbers (5% adjusted turns into losses on reported GAAP), we are not sure what to take away, but comments were undoubtedly negative versus last Fall and on trend with a 1H17 of losses. Near-term they noted that 2H17 is expected to see operational improvements vs 1H17 in short cycle businesses (OFS and Digital solutions) and specifically noted that Harvey impacts have not been evaluated yet, which are likely to be incrementally negative. While synergies are on track, core fundamentals in the near term are clearly tracking well below prior expectations with 2017 expected to end below prior deal targets and 2018 expected to ‘grow’ off of the low base. Management seemed to vaguely suggest that standing 2H17 and 2018 consensus earnings expectations (Street 2018 EBITDA is ~$4B, JPMe ~$3.8B) ‘broadly’ reflect the company’s expectations, and noted that there remains a significant amount of uncertainty in the marketplace. For background, they had guided to ~$5.2B in 2018 EBITDA last Fall, when oil price was $47 versus $48 today, showing not that much change in the leading indicators. For 2018, they expect growth in ‘most’ segments and specifically cited challenges in the oilfield equipment business (subsea/BOPs), higher uncertainty in LNG (Turbomachinery profits were down ~25% y/y in 1H17), and overcapacity in drilling which is driving pricing pressure. On cash flow, they continue to target 90% FCF conversion (unclear what the conversion definition is here given various definitions of legacy GE), with 40-50% of net income returned to shareholders over time, or ~$1B using 2020 consensus estimates. Recall GE receives ~62.5% share of all cash returned to shareholders (div + buyback). There was no comment on one-time buyback specifically. Of note is the fact that the combined company delivered -$0.4B in FCF in 1H17, and the ~$4B of cash on the balance sheet includes $1B of restricted cash and comes after a $1.5B “net cash transfer from parent” in 2Q, essentially a capital infusion. All in, we harken back to the Bulls who called this one of the best deals they had seen last Fall. Separately, the company also filed supplemental disclosures for the combined co revs/orders and profits, and we noticed a series of reclassifications within the segments, with the actual 2Q adjusted operating income ~$0.1B lower than our JPM Oil services team estimates. Note that the supplemental also disclosed ~$0.3B in corporate costs in 1H17 with ~$0.5B in merger/restructuring/impairment/other costs which combined add up to a GAAP operating number below breakeven. Among the segments, the major divergences vs our estimates were reclassification from Oil Field equipment to Digital which drive a significant dilution in our prior Digital margin assumptions, and lower Turbo margins (unclear if there is a one-time cost that drove this, but the downside here is  surprising). Net-net, lots of TBDs remain on the numbers and all eyes are on the official investor update expected later this month.

·   Aviation/HC solid, Transportation tough. There have been no major news items here to change our thinking on the near-term/2018 outlooks for the Aviation, Healthcare, and Transportation segments. Starting with Aviation, margin mix headwinds (LEAP ramping) represent the biggest near-term issue for numbers, though we think this is already built into the 2H guide, so see risks here as balanced. For Healthcare, we continue to expect solid MSD+ profit growth, driven by ~LSD in the US/Europe, strength in emerging markets, and productivity offsetting ongoing price pressure. Lastly, Transportation trends should remain difficult in 2018, with locomotive demand continuing to decline in the US freight railroad markets.

·   Bigger gap between Vertical asset earnings and GE Cap continuing ops could remove another $500 mm in earnings and some cash; Insurance asset evaluation may drive higher reserve requirements, ultimately a cash event. Our standing model forecasts $1.9B of profits from Vertical assets (GECAS, EFS, Industrial Finance, other), dropping to ~$1-1.5B when considering other items (excess debt costs, HQ costs, preferred dividends, etc), though we now think $500mm-$1B may be a more appropriate run rate for GE Cap continuing ops mostly because of tax benefits in 2017 that are not sustainable. Evaluation of the Insurance assets is a risk to the outlook, though management needs to determine if recent claims experience is a change in trend or an aberration. If, for example, reserves are deemed necessary for the $30B+ Insurance assets, this would be a cash event and require a cut into the dividend from GE Capital and ultimately the buyback. We are currently estimating another $3B of GE Capital dividends in 2H, with $1B in 2018. There is now downside risk to the $1B ongoing run rate dividend we had been assuming.

·   Recent news of activist push for Board seat interesting, not necessarily positive. Given a low score on the thesis to outcome ratio, we continue to scratch our heads as to how the mention of Trian elicits a market reaction. That said, last week it was reported that Trian’s Nelson Peltz is likely to seek a seat on the GE Board of Directors driving some recovery from early in the week softness. It’s not so much their desire for a Board seat that is interesting (they tried earlier in the Spring, and it didn’t happen, though were able to push for further structural cost reductions and management changes), as much as the timing of the announcement. We wonder why with a new CEO now in the seat taking action an activist would feel the need to re-engage if the plan is enough to satisfy near term Bull expectations.

·   Bottom line: clear downside to current expectations. Trying to think about positives from this mosaic, we would construct a Bull case that says it’s positive that the “reset” is finally coming into view, providing certainty, and that the dividend will hold, with cost cuts providing earnings growth. The Bear response however would be that the stock does not reflect this degree of reset, trends are worse near term, making the reset less credible, with lingering questions around the degree of growth off of this base which is only partially cyclically depressed (i.e. cost cuts continue to only plug secular holes) – this is not CAT where a “reset” to trough gets a substantially higher multiple because GE is not as cyclical, and potential growth off the reset number is not enough to call for a higher multiple. Lastly, selling assets just to maintain the dividend is not sustainable and dilutive. With limited resources for capital deployment, and the mixed growth outlook for these late cycle businesses, our 2020 GAAP estimate ($1.51), which may be too high, is below standing consensus for 2017, with $1.25 in FCF. This lack of growth is probably the most underappreciated aspect of the story for short sighted bottom fishers, and a big differentiator versus other past “reset” stories like Emerson, who had short cycle tailwinds, 20% balance sheet optionality and 100%+ FCF conversion. GE ranks low on all fronts and looks to us more like JCI, a lower growth portfolio that trades at a ~25% discount on reported EPS but close to parity on FCF. Bottom line, there are more negatives than positives, and if EPS has downside risk, then so does our $22 PT.

 

 

 

 

Investment Thesis

GE has transformed significantly, with major portfolio change on the GECS side, the largest deal in its history with Alstom, various financial frameworks, an activist, IOT emphasis, and the first year of stock outperformance in 2015 since 1999. Despite the upcoming CEO change, by the numbers, we see a core operating performance that is below plan, and, currently, a consensus expectations curve that we think remains too high, FCF that is the weakest in the sector, and, with that backdrop, a valuation that is expensive, with limited incremental catalysts to change the narrative. We stick to what the numbers say, which underpins our UW rating.

Valuation

Maintain UW; maintain Dec 2017 PT at $22. On our 2018 EPS estimate, GE shares now trade at ~16.5x, a ~10% discount to peers. Our Dec 2017 price target of $22 is based on an average of our regular fundamental approach based (which shows ~$24) on EPS as well as various SoTPs (which shows ~$20). A $22 PT would imply a ~20-25% discount (~15x) to our sector target multiple of 19x on our 2018 Industrial EPS estimate. For GE Cap we use a $1 value based on ~$10B in pro-forma tangible equity assumptions for left-over GE Capital (click here for our detailed calc on GE Capital valuation). Our group target multiple of 19x is at a ~5-10% premium to the standing S&P FY2 multiple, in line with its historical premium.

Risks to Rating and Price Target

Upside risks include: 1) significant improvement in FCF generation, 2) stronger-than-expected uptick in Digital revenues, which also helps profitability, 3) fundamentals in Oil & Gas recovering faster than expected, 4) better-than- expected execution on product transition in Aviation and 5) Power fundamentals do not deteriorate as expected

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Important Disclosures

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·  Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities issued by General Electric Co..

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Date Rating Share Price ($) Price Target ($) 11-Sep-14 N 26.02 28.00 24-Sep-14 N 25.93 27.00 05-Jan-15 N 24.60 26.00 26-Jan-15 N 24.59 25.00 10-Apr-15 NR 28.51