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Shares of General Electric Co. fell sharply on heavy volume Monday amid concerns over what recent management changes might suggest about the industrial conglomerate’s third-quarter results, which are due out next week.
The stock GE, -3.94% tumbled 96 cents, or 3.9%, to suffer the worst performance among components of the Dow Jones Industrial DJIA, -0.06% and to close at the lowest level since Aug. 25, 2015. Volume ballooned to 139.8 million shares, enough to make the stock the most actively traded on major U.S. exchanges, and more than triple the full-day average of 43.6 million shares.
GE said late Friday that Chief Financial Officer Jeffrey Bornstein was leaving the company, and that fellow vice chairs John Rice and Beth Comstock will retire. Earlier last week, Jeffrey Immelt retired as chairman nearly three months earlier than originally planned, as current Chief Executive John Flannery was elected to the additional role of chairman. Flannery became CEO in July, after Immelt stepped down.
J.P. Morgan analyst C. Stephen Tusa said these management changes reinforce his view that the fundamental challenges that GE are facing are worse than Wall Street is currently discounting.
“We view this incremental new wrinkle as a clear negative,” Tusa wrote in a note to clients. “Sell side bulls say this is the new CEO showing strength, as the CFO is ‘accountable’ for cash flow. If this were the case, we wonder shy CFO Bornstein was kept around this long and pitched as such an important part of the solution,” noting that the weakness in cash flow in the first half of 2017 isn’t new information for investors.
History indicates investors have good reason to be worried about GE’s earnings report. The stock has fallen on the day results were reported the past seven-straight quarters, by an average of 1.6%. The company is scheduled to report results on Oct. 20, before the market opens.
He reiterated his underweight rating, which he’s had on the stock since May 2016. His $22 stock price target is 6.1% below current levels.
Citigroup’s Andrew Kaplowitz has been among a group sell-side analysts bullish on GE’s stock, as he reiterated his buy rating and $31 stock price target.
“We choose to view GE’s sudden announcement of more significant announced leadership changes as ‘glass half full,’” Kaplowitz wrote in a research note. “We understand that GE bears could view this announcement as another signal that GE’s near-term results and/or medium-term recovery could be slower/choppier than expected, but these changes likely represent a necessary step toward a more accountable, streamlined GE.”
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Then on Monday, GE said it elected Ed Garden, the chief investment officer of activist investor Trian Fund Management, to its board of directors, replacing a retiring Robert Lane. “Like other GE shareholders, I am disappointed by the recent performance of GE’s stock,” Garden said.
GE’s stock has tumbled 26% year to date, by far the worst performer among Dow components, while the Dow has run up 15%. GE is the only company that remains in the Dow since its inception in May 1986.
Trian, the hedge fund founded in 2005 by billionaire Nelson Peltz, Garden and Peter May, could be losing over $540 million on the 67.42 million shares of GE it owned as of Dec. 31. Since then, filings show that Trian increased its stake to 70.85 million shares through June 30. With 0.82% of the shares outstanding, Trian is GE’s 10th largest shareholder.
Since the end of the second quarter, GE’s stock has declined 13%. Over the same time, the FactSet consensus for earnings per share has declined to 50 cents from 53 cents, while the revenue consensus has increased to $32.56 billion from $32.25 billion.
After second-quarter results, revealed on July 21, the stock slumped 2.9% after GE beat EPS and revenue expectations, but outgoing CEO Immelt gave a downbeat profit outlook for the year, as the recovery in the oil and gas market had been slower and more volatile than planned.