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Despite Uncertainty, the Speculative Case for GE Stock Is Still Solid

Will Healy

GE (NYSE:GE) stock held steady following a question and answer session at the Electrical Products Group Conference. Though troubles remain for the Boston-based industrial conglomerate, investors and analysts have begun to believe in the turnaround plan put forth by CEO Larry Culp. GE stock still trades in a range.

General Electric Stock ge stock

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Also, it did not move significantly even though Culp reaffirmed negative cash flow forecasts for 2019. Nonetheless, if his plan continues to reduce debts, spin off non-core operations, and turn profits, General Electric stock will break much higher in the coming quarters and years.

Culp confirmed that the company expected negative free cash flow of $2 billion in this fiscal year. However, he also expects this outflow to end in 2020 and sees a cash flow “acceleration” in 2021. GE’s latest earnings report and now this newest affirmation seemed to quiet many of the doubters who had all but left the company for dead.

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In previous articles about GE stock, I repeatedly complained about what I called a “constant drip” of new issues. The seemingly endless litany of bad news led GE’s board to fire John Flannery in favor of Culp, the former CEO of Danaher (NYSE:DHR), last October.

GE Really Might Recover

Now, just seven months into Culp’s tenure, the litany of new troubles appears to have come to a stop. Instead, we see signs of an emerging recovery. GE beat both revenue and earnings estimates in the previous quarter.

Also, investors remain concerned about GE Power, but they also saw early signs of improvement. Though sales volumes continue to fall, they have declined by lower rates. The division has also seen a turnaround in the value of its orders.

Moreover, the long-term debt I mentioned more than three months ago has come down by more than $5 billion in just one quarter. It now stands at $91.57 billion, slightly higher than its market cap of just over $87.5 billion. Short-term debt rose by almost $2.9 billion in the same period. However, both long and short-term debt levels have fallen on a year-over-year basis.

GE Has Far to Go

To be sure, GE is not out of the woods yet. On top of the negative free cash flow, the length of the current economic growth cycle far exceeds long-term averages. Though few predict a looming recession, the long economic expansion increases the risk of such an event. Such a downturn would at least delay a GE turnaround.

Furthermore, GE Aviation, currently GE’s best-performing division, faces uncertainty with its status as the sole supplier of engines for Boeing’s (NYSE:BA) troubled 737 MAX.

So far, the Aviation division has incurred no impairment charges related to the 737 MAX. Moreover, both orders and backlogs rose for this division on a year-over-year basis. Still, investors should watch for any Boeing-related troubles in future quarters.

GE Stock Is Rangebound

Still, for all of the remaining challenges, this report has further helped to quiet those who predicted the demise of GE. Moreover, General Electric stock remains in the $10 per share range, about the same levels of three months ago.

Today, confidence in the company has increased, yet GE stock has traded in a range since late January. The range adds uncertainty but also gives investors more time to buy.

The critical point is the equity’s 2019 high of $11.30 per share. If GE can sustain itself past that point, I think the more optimistic $14 to $16 per share price target will become achievable.

Concluding Thoughts on GE Stock

Despite concerns of range-bound trading and deeply negative cash flows in 2019, Mr. Culp’s recovery plan has begun to make a recovery in GE stock appear plausible. Yes, GE continues to struggle with cash flows. However, if company forecasts hold, that should turn around by next year.

Moreover, the company’s divisions continue to show improved performance as revenues increase and debt levels decline. Culp also continues to sell non-core businesses. As this smaller, more-nimble GE begins to emerge, bears continue to pare back their doomsday scenarios, and a long-absent sense of confidence has started to return.

GE still has a long way to go. Like any recovery, this one will also face challenges, as well as risks. However, as I stated back in February, a speculative buy case for GE has emerged.

The first quarter numbers and even the continued negative cash flows reaffirm this thesis. For those who have the stomach for the risk, I think GE stock can rise much higher once it sustains itself above $11.30 per share.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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