What a difference strong leadership can make for a company, as shown by General Electric (NYSE:GE) stock. Larry Culp, who came on board as CEO in October 2018, had the unenviable task of leading the company’s turnaround.
But his moves has been decisive and strategic. More importantly, he has brought realism to the company. Then again, Culp demonstrated those abilities while he was the CEO of Danaher (NYSE:DHR), which generated standout results for shareholders during his tenure.
GE stock has done great during Culp’s brief time with the company. Since December, the shares have gained 55%.
But turnarounds often take a long time. And that will certainly be the case with GE’s efforts. There is still lots of heavy lifting to be done, and GE is facing some tough headwinds. In other words, investors should be cautious, as the easy gains of GE stock may be over.
In fact, there are already signs of that. Keep in mind that GE stock has been in a persistent range of $9 to $11 since February.
So what issues is GE facing? Let’s take a look at three risks of investing in General Electric stock.
Risk Facing GE Stock: GE’s Financials
One of the biggest changes at GE has been Culp’s transparency with Wall Street. To this end, he says that 2019 will be a “reset” year. But the fact is that GE has a tremendous amount of debt and contingent liabilities. Cumulatively, GE owes a staggering $107.5 billion. So for quite some time, Culp will be mostly focused on finding ways to generate cash. To help accomplish that goal, he’s already agreed to sell GE’s biopharma business to Danaher and divest its locomotive segment, which was acquired by WabTec (NYSE:WAB).
But given that GE is cyclical and that the global economy appears to be slowing, GE could easily report negative earnings surprises in the months ahead.
Risk Facing GE Stock: GE’s Aviation Business
The aviation business has been positive for General Electric stock for some time. As seen at this week’s Paris Air Show, the unit is snagging plenty of orders. Note that it recently signed its biggest deal ever, agreeing to sell $20 billion of engines to an India-based airline.
But unfortunately, the aviation business is still facing headwinds. For example, Boeing’s (NYSE:BA) 777X widebody jet will not meet its deadline because of a problem caused by GE’s engines. The problem is likely temporary, but it’s still worrisome and will cause a meaningful amount of GE’s revenue to be delayed.
It’s far from clear what will happen with the 737 MAX, which has been grounded because of two crashes. But again, this means loss of momentum for GE’s engine business.
Risk Facing GE Stock: GE’s Power Business
The Power Business, which accounts for roughly 20% of GE’s overall revenues, continues to be a problem for the company. The competitive environment of the sector is intense, demand for Power’s products has been sluggish for some time, and it’s been accused of being less than 100% forthright about its results. There are also signs that Chinese companies may make inroads in this industry.
Here’s what JPMorgan analyst Stephen Tusa has said about the situation: “We believe a full accounting of the situation with a closer look at the data, even a rudimentary review, supports our view that GE is indeed losing market share…”
Keep in mind that Tusa was able to predict the implosion of GE stock. Consider that he currently has a $5 price target on the shares, implying a drop of more than 50% from their current levels.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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