Shares of General Electric (GE) are on the rise after the recently appointed CEO Larry Culp disclosed the purchase of 225,000 shares at a price of $9.73 for a total value of $2.189M. Bearish on General Electric, Gordon Haskett analyst John Inch argued that GE could trade down to about $5 per share, assuming that GE Capital does not ultimately face insolvency, if the market were to value the stock increasingly on a free cash basis. Meanwhile, the company responded to recent tax liabilities speculation, saying that it does not see change in regulation that would cause increase in tax accrual. POTENTIAL DOWNSIDE TO $5: In a research note to investors, Gordon Haskett’s Inch argued that General Electric could trade for about $5 per share if the market were to value GE increasingly on a free cash basis, assuming that GE Capital does not ultimately face insolvency. It would seem that most of the bullish analysts and investors are basing their upside views on sum-of-the-parts to value GE that invariably ascribe large valuations for the Aviation and Healthcare businesses, he contended. The analyst believes that the central problem with this approach is that it is “academic” as GE cannot completely dismantle to realize its true SOTP as the company is required to maintain a sufficient revenue and asset base to support all of GE Capital’s tens of billions of dollars of debt securities. Moreover, Inch pointed out that it seems doubtful, given GE’s excessive financial leverage, that its “crown jewel segments” would trade at peer EV/EBITDA multiples after apportioning GE’s high debt across its business parts. Additionally, the analyst believes that “no one, including the company, has an accurate handle on the magnitude of GE’s total and embedded on-balance sheet and off-balance sheet liabilities,” which could ultimately exceed $100B. He reiterated an Underperform rating and $10 price target on the shares. TAX LIABILITIES: On Friday, Gordon Haskett’s Inch argued in a separate research note that GE’s near-term tax liabilities could be about to significantly increase, possibly amounting to billions of dollars more in incremental cash taxes over the coming months. The primary sources of the tax pressure would appear to be a result of the U.S. Treasury/IRS finalizing the impacts from U.S. tax reform, he contended. Based on GE’s previous large unrepatriated foreign earnings balance, Inch said it could have been surmised that GE might have owed up to $9B in taxes per the Tax Cuts and Jobs Act, but instead “the company took a much lesser $3.3B charge while indicating it expected to pay little in incremental cash taxes due to a variety of offsets.” If even some of these “offsets” are disallowed, Inch believes the company could wind up owing a large tax bill near-term, coming at a “difficult time” for GE given its deteriorating cash flow, declining Power fundamentals and rising GE Capital funding costs as the company is forced out of the commercial paper market. While the company took an equity capital raise off the table, the analyst believes ongoing cash and liability pressures, including the prospects of rising taxes, “may result in a future change to this decision.” Meanwhile, General Electric said it does not see change in regulation that would cause increase in tax accrual. “There has been some speculation regarding GE’s potential tax liabilities and in light of this, we want to clarify the facts for investors. Based on current law and guidance, we believe our current accrual is a reasonable estimate for the enactment of tax reform. We have filed our 2017 Federal income tax return and have paid the associated liability. We expect additional guidance from the Federal government, possibly in the fourth quarter of 2018, and we will finalize our accrual and reflect any increase or decrease in liability, as flagged by our CFO during the company’s Q3 earnings call. GE does not expect any change in proposed or potential regulatory guidance that would cause our tax accrual to increase by billions of dollars,” the company explained. PRICE ACTION: In morning trading, shares of General Electric have gained almost 1% to $9.34.