General Electric (NYSE:GE) was struggling going into the novel coronavirus outbreak and it’s struggling amid the pandemic. Is that a good enough explanation as to why to avoid it? Likely not. GE stock remains 46% below its February high, while falling almost 60% from peak to trough.
Based on just those two performance metrics, investors would have been far better off in an index fund. They would have experienced less volatility — the S&P 500 and Nasdaq fell 35.4% and 32.6% from peak to tough, respectively — and more gains on the rebound.
The S&P 500 is less than 5% off its February highs, while the Nasdaq has bombarded its way to record highs. GE stock, on the other hand, has rallied just 28.5% from the lows. That sounds impressive, but lags its peers, sector and even the S&P, (the latter of which is up almost 50% from the lows).
But its performance vs. the index isn’t necessarily why investors should avoid the name. Instead, they should avoid it because the business remains at risk.
GE Stock Is Stuck In Reverse
This business continues to get hammered. Not only is Covid-19 acting as a drain on free cash flow, but it’s sapping the industries that General Electric relies on.
I do want to say that CEO Larry Culp has done a good job with GE in his short time with the company. He has acted swiftly to improve cash flow, raise capital and shore up the balance sheet. He’s trying to turn around a boat in the ocean, but this isn’t a Boston Whaler — it’s an aircraft carrier.
General Electric had so many pockets of weakness under its umbrella that it’s impressive the entire thing didn’t collapse. That ranges from poorly timed deals in the energy space to ballooning pension obligations. Even with many of these issues cleared up or improved on, what makes this investment attractive? The fundamentals continue to decline, its end markets are under pressure and there is no growth.
Analysts expect sales to fall year-over-year again in 2020, this time by 17% to just $79 billion. Keep in mind, General Electric racked up $121.6 billion in sales two years ago in 2018. On the earnings front, consensus expectations call for an 86% plunge to 10 cents per share.
Who cares if estimates for 2021 call for a near-350% rebound in earnings to 40 cents per share? Even if that comes to fruition, it’s still down almost 40% from last year’s earnings. That’s on just 4% revenue growth forecasts, by the way.
Again, I commend Culp on the job he’s done under the circumstances that he is operating under. In his own words, GE is working on “a series of actions to de-risk and de-lever our balance sheet amid a challenging environment.” But it isn’t easy.
Bottom Line on General Electric
My biggest issue with GE isn’t estimates for 2021 or that the stock price underperformed the indices on the way down and has lagged on the way up. My problem with General Electric is simply the business.
Last quarter had free cash outflow of more than $2.2 billion. That was an 80% decline from the same period a year ago, where the company had an outflow of $1.21 billion. It was also worse than the $2 billion estimate that analysts were looking for.
GE is made up of five units, the largest of which is aviation. The other four include: Power, Renewables, Healthcare and GE Capital.
Renewables reported a solid 26% jump in revenue, but segment profit plunged more than 60% year-over-year. Further, this unit reported a loss of more than $300 million in the quarter. Healthcare saw a 1% jump in revenue and a 15% boost in segment income to $896 million. That was a bright spot.
Three of the five segments overall reported a loss, with gains coming only in aviation and healthcare.
However, the destruction in aviation is a huge concern. With airlines seeing only a slow return to flying and aircraft demand under extreme pressure, this unit is a worry. Be it Boeing (NYSE:BA), Delta Air Lines (NYSE:DAL) or others, this sector is troubled. When a company’s largest unit is limping like this, it’s hard to be a buyer of the stock.
This leaves GE stock as a “prove-it” stock and not one that earns the benefit of the doubt. General Electric is set to report earnings at the end of July. Let’s see what Culp & Company have to say then. If they’ve pared down enough risk, we may be willing to change our tune on this struggling icon.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.