Credit rating agency, Fitch Ratings recently downgraded industrial goods manufacturer General Electric Company (GE - Free Report) related to both short-term and long-term issuer default ratings. Despite the downgrade, its shares remained resilient and rallied 1.6% to close at $18.41 yesterday.
Citing relatively low margins and less-than-anticipated free cash flow, Fitch lowered the long-term and short-term issuer default ratings for GE to "A+" from "AA-" and to "F1" from "F1+" with a negative outlook, respectively. The rating agency noted that GE was plagued by a weaker performance in the power segment’s gas turbine business owing to lackluster demand patterns and higher inventory in the market.
Fitch further pointed out that although GE intended to improve its profitability by reducing overhead costs by $2 billion in 2018, majority of which is likely to come from the beleaguered power segment that sells electrical generation equipment, execution risks remain. In addition, cash flow is likely to be adversely affected by the suspension of dividends by GE Capital.
The current rating downgrade is the second of its kind. Earlier this month, Moody’s Investor Service, the credit rating business of Moody's Corporation (MCO - Free Report) , lowered GE to "A2" from "A1" owing to likely challenges in the power segment which might persist till 2019.
Shares Defy the Negativity
Despite the negative undercurrent, the company’s share price moved up as investors seemed to repose some faith in the latest restructuring process of the company. CEO John Flannery has decided to focus on just three core segments — power, aviation and health-care equipment — and gradually exit all other businesses. GE further intends to have asset sales worth $20 billion to improve its liquidity.
Flannery has termed 2018 as a reset year and expects the company to stage a turnaround to reward its shareholders with risk-adjusted returns. Critics, however, have widely raised concerns about the efficacy of such steps.
However, shares of GE have underperformed the industry year to date, with an average loss of 41.8% compared with a decline of 4.4% for the latter.
Zacks Rank & Key Picks
GE has a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the industry include Danaher Corporation (DHR - Free Report) and Leucadia National Corporation , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Danaher has a long-term earnings growth expectation of 10.6%. It has surpassed estimates in each of the trailing four quarters with an average positive surprise of 2.6%.
Federal Signal has delivered an earnings beat thrice in the trailing four quarters with an average positive surprise of 11.5%.
Leucadia has an expected long-term earnings growth rate of 18%. It has exceeded estimates thrice in the last four quarters with an average beat of 21.2%.
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