Expect More Ugly GE Surprises Before Turnaround Is Done

First, the company's fourth-quarter charge will climb to $7.5 billion after taking into account the impact of new U.S. tax legislation and a 21% rate. GE is among the select few industrial companies for whom the Tax Cuts and Jobs Act could be more of a penalty than a benefit. The company's consolidated effective tax rate was negative 5.1% in 2016. Additionally, while the forced repatriation of its undistributed foreign earnings may ultimately increase its financial flexibility, the company in the meantime is still looking at what Vertical Research Partners analyst Jeff Sprague sizes at an $8 billion tax liability. Even spread over eight years as allowed by the new law, this will be a meaningful draw on cash flow at a time when GE has very little to spare.

Along these lines, GE can't borrow money from its industrial businesses right now to help plug the holes in these legacy insurance assets. The company is expecting between $6 billion and $7 billion in industrial free cash flow this year, although analysts say the real number is closer to zero if you account for pension liabilities and capital expenditures as other industrial companies would. As such, to help bring leverage at GE Capital down to the targeted level, GE will have to further shrink that business.

It's planning on reducing its energy financial-services business to less than $5 billion of assets by 2019, down from about $10 billion now. Its industrial finance operations will be whittled down to about $15 billion of assets, from $26 billion currently, over the same time period. That risks being dilutive both to earnings and to the valuation prescribed to that business in any sum-of-the-parts analysis.

At the risk of sounding like a broken record, there is still a ways to go before GE becomes a company worthy of investors' trust.

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