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A worker looks at the 9HA Gas Turbine, at the General Electric plant in Belfort, France.

Frederick Florin | AFP | Getty Images

General Electric‘s announcement that it is freezing pension plans for about 20,000 U.S. employees is part of the company’s “next steps in the balance sheet unwind,” J.P. Morgan analyst Stephen Tusa wrote on Monday.

While the pension freeze helps cut some of its debt, the analyst expects GE will take further steps, as the conglomerate seeks to reduce its leverage – the ratio of GE’s debt to the value of its equity.

“Ultimately, we see more cuts to consensus and additional resources as needed to truly ‘normalize’ the balance sheet,” Tusa said.

GE shares were largely unchanged in trading from its previous close of $8.57 a share. J.P. Morgan has an underweight rating on GE’s stock with a $5 price target.

Tusa, the most bearish analyst on GE’s stock, has gained a following in recent years. He issued early warnings that the company’s stock was worth much less than others believed.

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

“It’s notable that today’s moves and $4-5 B of cash contributions merely offset the $7 B increase in added liability since YE18 [year end 2018], so really do not represent any progress versus where it stood at YE18,” Tusa said. “We understand rates are outside of the company’s control, but that is the point, it’s a risk that is a known unknown and something we think a key consideration to investing in, and running for that matter, a company with almost 1,000,000 people under entitlement.”

Tusa also said investors should watch how GE accounts for any tax benefits related to the pension freeze.

“Last year they adjusted gross pension out of [free cash flow], and left the $1 B+ tax benefit in, and adjusting both this year will be a marked step forward from a credibility perspective as a needed departure from the past. If not, we would question whether anything has changed,” Tusa said.

Finally, Tusa pointed out that the pension freeze’s effect on GE’s earnings will depend on “if the adjustment of the pension contribution is on a gross or net of tax basis,” he said. Tusa noted that when GE contributed $6 billion to its debt last year, the company “stripped out all $6 B but left in the $1 B+ tax benefit, despite presenting everything else net of tax.”

“We are awaiting guidance from the company on the impact of this move on pension service cost (“operating pension”) which would flow through earnings,” Tusa added.

– CNBC’s Michael Bloom contributed to this report.

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