- GE bulls were emboldened by the eye-popping Biopharma sale.
- The following chart illustrates how GE's debt is at junk levels before and after the Biopharma deal.
- Another ratings downgrade could sink the stock. Sell GE.
- This idea was discussed in more depth with members of my private investing community, Shocking The Street. Get started today ยป
GE gas turbine worker. Source: Barrons
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.
