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GE's Unwelcome Surprise

We're assessing the impact, but don't expect to change our fair value estimate for the firm.

Mentioned:

General Electric intends to take a $6.2 billion aftertax charge against fourth-quarter 2017 earnings after completing a comprehensive review of the long-term care insurance portfolio within GE Capital. While GE hinted such an action would be necessary at the Nov. 13 investor update, we were surprised by the magnitude of the deficiency, particularly given that this business has been in runoff mode for over a decade; we are assessing the impact of this disclosure, but initially expect no material valuation change.

This unwelcome surprise underscores the magnitude of the task new CEO John Flannery faces as he uncovers weak points across the still-sprawling conglomerate. That said, we are encouraged that GE Capital has sufficient liquidity to support the contributions, from its $31 billion of cash and suspension of dividends to the parent; we suspect that GE Capital dividends will not resume until mid next decade, but GE's industrial business will not further strain cash flow by having to rescue GE Capital. Although management indicated that full 2017 earnings will be at the low end of the $1.05-$1.10 range, industrial cash from operations may exceed the latest $7 billion forecast.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.