UBS upgrades GE to buy after market selloff: ‘Larry Culp is key’

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Men work with a jet engine at General Electric (GE) Celma, GE’s aviation engine overhaul facility in Petropolis, Rio de Janeiro, Brazil.

UBS bumped its rating of General Electric shares to buy from neutral on Wednesday, saying the battered stock is primed for a turnaround with CEO Larry Culp at the helm.

GE shares rose 0.7 percent in premarket trading a day after falling below $10 for the first time since 2009.

“We think peak uncertainty has been reached and expect forward corporate event catalysts and portfolio moves to improve visibility and to strengthen the balance sheet,” UBS analyst Steven Winoker said in a note. “Let’s be clear. Larry Culp is key to our upgrade.”

Culp’s ability to lead GE is Winoker’s number one conviction for upgrading the stock.

“Despite all the differences from the experience with Danaher, we think Culp will succeed in improving the businesses, optimizing capital allocation and cleaning up whatever needs to be cleaned up over time,” Winoker said.

The first GE earnings report under Culp saw him cut to the quarterly dividend to just a penny a share. The company also made a host of other third quarter announcements, including a $22 billion charge related to acquisitions in its power business which the SEC and DOJ are including in their investigations of GE accounting practices.

Winoker pointed out the “pace and magnitude” of the challenge facing Culp but says that “can be managed.” He laid out the risks, saying “the math” behind GE “highlights a number of risks.”

“With yet another SEC investigation and ongoing litigation, plus the lack of 2018 cash and earnings guidance, we remain concerned about the integrity of the numbers fed to senior management,” Winoker said.

Despite those risks, Winoker said UBS believes “the downside still gives us positive skew.” With the stock hitting new 9-year lows, “we think the greater risk is that we are early,” Winoker said.

The stock closed Tuesday at $10.18. UBS has a $13 price target on GE shares.