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Pension freeze sign that more cuts are coming



A worker is looking at the 9HA Gas turbine at the General Electric plant in Belfort, France.

Frederick Florin | AFP | Getty Images

General Electric's announcement that it freezes retirement plans for about 20,000 US employees is part of the company's "next step in the balance, relax," JP Morgan analyst Stephen Tusa wrote on Monday.

While retirement freezing helps cut some of its debt, the analyst expects GE to take further steps as the conglomerate seeks to reduce leverage ̵

1; the ratio of GE's debt to the value of equity.

"Ultimately, we see more cuts to consensus and additional resources as needed to really & # 39; normalize & # 39; the balance," Tusa said.

GE shares remained largely unchanged at $ 8.56. J.P. Morgan has an underweight rate on GE's stock with a price target of $ 5.

Tusa, the most bearish analyst on GE's stock, has been following suit in recent years. He gave early warnings that the company's stock was worth much less than others thought.

GE emphasized that it has unveiled between $ 9 and 11 billion in net debt reductions over the past month. But Tusa focused on how much this pension freeze helps GE achieve its long-term goal, which is to have debt less than 2½ times EBITDA (earnings before interest, tax, depreciation and amortization) by the end of 2020.

"It is noteworthy that today's move and $ 4-5B in cash contributions only offset the $ 7B increase in additional liability since YE18 [year end 2018] so really does not represent any progress versus where it stood at YE18, ​​"Tusa said. "We understand that prices are beyond the company's control, but that's the point, it's a risk that's a known unknown and something we think is an important factor in investing in, and operating for that matter, a company with nearly 1,000 000 people who are entitled. "

Tusa also said that investors should see how GE stands for any tax benefits related to the pension freeze.

"Last year, they adjusted the gross pension out of [free cash flow] and added fiscal benefits of $ 1 B + in, and adjusting both this year would be a marked step forward from a credibility perspective as a necessary departure from the past. If not, we want to ask if something has changed, "Tusa said.

Finally, Tusa pointed out that the effect of the pension freeze on GE's earnings will depend on "if the adjustment of the pension contribution is gross or net by tax basis," he said. Tusa noted that when GE contributed $ 6 billion to its debt last year, "the company deducted the entire $ 6 B, but left in $ 1 B + tax benefits, despite presenting everything else net after tax."

"We are awaiting company guidance on the impact of this move on pension costs (" operating pensions ") that would flow through earnings," Tusa added.

– CNBC's Michael Bloom contributed to this report. [19659017]
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