The Worst May Not Be Over for General Electric

Stocks to sell

As expected, General Electric’s (NYSE:GE) second-quarter earnings were dismal, sending GE stock lower by 4.35% on July 29, the day the report was delivered.

GE logo on an airplane engine

Source: Sergey Kohl / Shutterstock.com

The industrial conglomerate lost 15 cents a share in the June quarter though revenue of $17.75 billion beat Wall Street estimates of $17.12 billion. Although revenue was better than expected, these numbers represent regression from a company that desperately needs to show it can make progress. A year earlier, GE earned 16 cents a share on sales of $23.41 billion. Its Q2 2020 operating loss ballooned to $2.14 billion from $115 million.

Broadly speaking, the industrial sector is a dud this year. The S&P 500 Industrial Index, a basket of large-cap industrial names, including GE, is lower by almost 11% year-to-date. The S&P 500 is up 1%.

By any measure, GE is an industrial offender with a 2020 loss of almost 41%.

Yes, there could be sequential improvements in the third and fourth quarters for GE. But there are also reasons to be leery of the stock and strongly consider deploying elsewhere.

Let’s explore some of the potential pitfalls GE faces.

GE Stock Beset by Boeing Woes

Some analysts and market observers insist on being bullish on GE stock, noting that the second-quarter results could have been worse. “Could have been worse” or “less bad” generally aren’t reasons to buy a stock. But, there are credible explanations behind the woeful April through June results delivered by GE.

Put simply, Boeing (NYSE:BA), a prime customer of the GE aviation business, is still struggling. The aerospace giant reported a second-quarter loss of $4.79 a share on revenue of $11.81 billion. Analysts expected a loss of $2.54 on turnover of $13.16 billion. A supplier, whether it’s selling widgets or jet engines, doesn’t want numbers from one of its most important customers to look like that.

“We’re working closely with our customers, suppliers and global partners to manage the challenges to our industry, bridge to recovery and rebuild to be stronger on the other side,” Boeing CEO Dave Calhoun said in a statement.

One way of interpreting that statement is Boeing is having difficulty forecasting when demand for passenger aircraft will rebound. Worse yet for Boeing, and thereby GE’s aviation business, is the dreadful second quarter may not be the worst stretch for Boeing. Translation: things could get worse before they get better.

Boeing said manufacturing volume will be reined in, which some analysts believe is a sign that cash flow margins could be crimped in the coming quarters.

Boeing and GE are right to be concerned about the state of the airline industry. Any ebullience accrued following the U.S. economic reopening is gone because of surges of the novel coronavirus. This scenario is pressuring airlines, which are cutting summer routes. And with conserving cash the order of the day for the industry, adding new jets while so many are grounded is out of the question over the near term.

Looking for Good News?

If an investor is desperate for good news regarding GE, the company’s cash burn rate declined in the June quarter.

Being cash flow negative at $2.1 billion, which GE was, was far better than the $3.29 billion cash flow negative mark analysts expected the company to post.

GE could be cash flow positive again sometime in 2021.

To get there, costs have to be reduced. The company already divested an array of businesses, so the easiest way to boost cash is to lower headcount. That means thousands of job cuts could be on the way.

Bottom Line on GE Stock

Bottom line: Covid-19 is a hurdle for plenty of companies across myriad industries, but it’s especially burdensome for GE.

Here’s why. Prior to the pandemic, the company was working on shoring up two units – GE Power and GE Capital. Now, aviation is another issue for a management team dealing with problems that plagued the stock for several years.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

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