General Electric (GE) stated on Friday that it sees potential Department of Justice action and announced that it restated 2016 and 2017 earnings as it adopts new accounting standards. Additionally, on Monday morning, GE announced its slate of director candidates, which consisted of 12 directors, including three new candidates.
10-K FILING: GE released a 10-K regulatory filing after the close on Friday, February 23. In the filing, regarding the Department of Justice, GE stated that it believes “the U.S Department of Justice is likely to assert that WMC and GE Capital violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 in connection with WMC’s origination and sale of subprime mortgage loans in 2006 and 2007.” Also in the filing, GE said it would restate 2016 and 2017 results. “We estimate that our 2016 and 2017 restated earnings per share will be lower by approximately 13c and 16c (before any impact from U.S. tax reform), respectively, driven primarily by the required changes in accounting for long-term product service arrangements.”
BOARD CHANGES: GE announced this morning that its new board will consist of 12 directors, including three new candidates, consistent with the company’s previously announced plan to reduce the size of its board. The three new candidates are H. Lawrence Culp, Jr., former CEO and President of Danaher (DHR), Thomas W. Horton, former Chairman and CEO of American Airlines (AAL), and Leslie F. Seidman, former Chairman of the Financial Accounting Standards Board.
ANALYST REACTION: In a note to investors this morning, JP Morgan analyst C. Stephen Tusa, Jr maintained an Underweight rating on GE shares, calling the situation a “liability story” as the company’s weak core free cash flow is unable to de-lever the balance sheet, leaving the company vulnerable to contingent liability risks. Similarly, Deutsche Bank analyst John Inch maintained a Sell rating and $13 price target on GE in a note to investors this morning, saying “risks abound” as the Department of Justice risks “appear to have moved higher.”
