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Oct 20, 2017

S3 Analytics: G.E. Shorts up $100 million on Earnings Miss

General Electric Co. (GE) is forecasting adjusted earnings well below 30% of expectations, at $1.05-$1.10 a share, and cash flow estimates, which have disappointed since the 1st quarter, are down almost 50% from projections, reinforcing the fear that the conglomerate may have to cut part of its $8 billion dividend as well as curtail its stock buyback program.

In response to the poor performance, new CEO John Flannery is looking for a rebound in its underperforming energy and power operations and $20 billion worth of business division divestitures over the next two years, such as transportation, in order to direct their focus and capital on their core business segments. 2017 cost cutting will meet its $1 billion target and GE will be looking to maintain those cost cutting levels for the next two years.

GE is the largest short in the worldwide Industrial Conglomerate Sector with $3.1 billion of short interest, or 40% of the total shorts in the sector.

GE’s short interest has been declining since 2016 when short interest averaged $3.8 billion.  After falling below $2 billion in May of 2017 short interest peaked at $3.1 billion in June and then fell again, to $2.1 billion in August. By September short sellers had again increased their exposure and short interest has been at or above $3.0 billion since then and is currently at $3.1 billion.

With GE’s stock price down over 3% today, short sellers have added another $100 million to their year-to-date mark-to-market profits today. Shorts are now up $913 million in year-to-date mark-to-market profits, up 36%, on their 2017 average short position of $2.6 billion.

Future GE short activity should be a good predictor of whether CEO John Flannery can control GE’s costs and increase cash flow. If not, impaired cash flows will affect GE’s ability to pay out its over 4% quarterly dividend and a cut would be expected. If the amount of December’s dividend cut is larger than is already priced into GE’s stock price, expect short interest to increase significantly as GE’s stock price takes another major hit.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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