General Electric‘s upcoming earnings may contain a fundamental change to the way the industrial conglomerate reports its accounting, a shift which one Wall Street analyst says is long overdue.
“We believe new CEO Larry Culp has every intention of establishing a (2019) guidance framework that the company can actually achieve in what we believe would be a welcome relief after years of non-credible GE guidance, perpetual exaggerations, opaque disclosure and aggressive accounting,” Gordon Haskett analyst John Inch said in a note to investors on Monday.
However, GE moving to an earnings presentation based on GAAP (Generally Accepted Accounting Principles) could “shock” the market, Inch said. GE’s quarterly earnings presentation currently does not include restructuring charges. Those restructuring charges are often more than $1 billion per quarter. Inch said the practice has been “helping to inflate” GE’s earnings.
“The degree to which the consensus forecast may have to come down could significantly negatively surprise the market, even though we believe investors generally expect Culp to bring down expectations,” Inch said.
GE is set to report fourth quarter earnings before the bell on Thursday. If Culp decides to change GE’s framework, Inch said that would follow with the investor feedback that his predecessor John Flannery got as CEO in the summer of 2017.
“One of the key feedback themes that Flannery repeatedly heard was for GE to establish a credible earnings ‘base,'” Inch said.
Investors told Flannery to bite the bullet and “come clean,” Inch said. But Flannery did not heed their advice, and did not move GE’s presentations to GAAP. Culp could change that.
“A move to GAAP would at least demonstrate Culp’s directional willingness to abandon the inflated and exaggerated earnings presentation practices of the past,” Inch said.
If Culp goes through with the change, Inch estimates 2019 earnings for GE of 64 cents a share. Inch also expects GE shares would move lower if Culp makes the change, as Wall Street’s consensus estimate would slip. The Street’s current GE 2019 earnings consensus is 83 cents a share.
GE shares slipped 0.3 percent in premarket trading from Friday’s close of $9.16 a share. Gordon Haskett has an underperform rating and a $7 price target on GE.