Fly On Wall Street

GE: One New Bull, One Big Risk

There’s good news and bad news today for General Electric (GE). And so far, the good news appears to be more powerful, sending the stock 1.3% higher in afternoon trading to $16.35.

The good news: Well-known investor Mario Gabelli, a member of the Barron’s roundtable, announced he’s been buying the stock on its recent pullback, and said he sees it getting to the low-$20’s in a couple of years.

The bad news: Deutsche Bank analyzed the company’s new disclosures about SEC investigations and thinks the news “significantly elevates the risks for GE.”

GE announced last week that the SEC is looking into its insurance reserves, or the money it sets aside to pay off liabilities in its insurance division. The company said it had a $15 billion hole in that division that it will have to pay off over the next several years.

The SEC is also probing GE’s accounting for its long-term service agreements, which are contracts GE signs for equipment and service that pay off over several years. Those agreements brought in $2.2 billion in 2016, and could contribute more than 20% of this year’s income.

The magnitude of those contracts, and the fact that there are multiple problems suggest that this issue could persist, wrote Deutsche Bank analyst John Inch in a note on Monday.

“We believe this investigation(s) significantly elevates the risks for GE. We also believe that the scope of the Enforcement Division’s investigation(s) could readily broaden to other areas,” Inch wrote.

Inch rates the stock at Sell and has a price target of $15.

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