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Earnings Highlight the Long Road Ahead for General Electric Stock

Matt McCall and the InvestorPlace Research Staff

Coming into 2020, it was clear that General Electric (NYSE:GE) had a lot of work to do. But investors were optimistic. GE stock started rallying after third quarter earnings in late October, and reached a 16-month high in February.

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The novel coronavirus has undercut that optimism. As I write this, GE stock has been halved from February highs. That includes a 3.2% decline on Wednesday after the company’s first quarter earnings report.

The falling stock price, unfortunately, makes some sense. General Electric’s challenges were significant even before the current crisis. Its outlook is downright grim now.

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The good news is that GE management at least is aware of those challenges. And the balance sheet gives General Electric some flexibility to respond. But Wednesday’s earnings report highlights the core problem with GE stock: even in a best-case scenario, it’s going to take a long time for this industrial titan to bounce back.

Not That Bad?

On its face, the Q1 release doesn’t look that bad, particularly in the context of a worldwide shutdown in March.

Total revenue declined 8%, but in the industrial business the top line was down just 5%. Orders, on an organic basis, fell only 3%.

Adjusted earnings per share did fall sharply on a percentage basis. But EPS of 5 cents doesn’t seem that weak against 13 cents in the year-prior quarter.

This doesn’t look like a great quarter. But it hardly appears disastrous, either. Many other companies have released far worse results — many more still will as earnings season rolls on.

Looking closer, there’s some good news as well, particularly on the order front. Healthcare orders rose 9%. The long-struggling Power segment drove 14% growth.

This seems like a decent report in the context of the broader environment. But investors clearly didn’t think so and I’m inclined to agree.


Fundamental Worries

The fact is that GE’s turnaround is going to take much longer than hoped (by management’s own admission).

In Power, even with solid order numbers, the business faces “a longer road to normalization,” as chief executive officer Larry Culp put it on the first quarter conference call. GE already has laid off 700 employees in the business, and is looking to take out more costs there.

In Renewable Energy, GE faced unspecified “execution” orders. Pressure on government budgets and plunging oil prices may push projects out.

And, of course, GE Aviation is facing collapsing demand as global air travel has come to a halt. Key customer Boeing (NYSE:BA) has seen its order book shrink dramatically as a result, and those lost orders impact the long-term outlook for GE Aviation as well.

As Culp noted, GE’s only real strategy is to try and limit the impact of lower revenue on margins as best it can. Meanwhile, GECAS (GE Capital Aviation Services) also is taking a hit.

GE Healthcare should rebound, particularly as elective procedures return once the focus on COVID-19 begins to recede. But that business is smaller after the company sold GE Biopharma to Danaher (NYSE:DHR) in a deal that closed last quarter.

Three out of four businesses are facing significant short-term problems. But those problems don’t end immediately when the global economy returns to some sense of normalcy. Aviation demand won’t snap back. Crude prices may well stay low, which would pressure both Power and Renewable Energy. If crude rallies, investors have many better options to play that commodity.

What Q1 shows is that the road has gotten even longer for General Electric.

On the Sidelines with GE Stock

It’s likely that sense to which investors reacted in selling GE stock on Wednesday. But there’s a broader issue at play as well, which becomes particularly clear when listening to the earnings call.

General Electric is reacting rather than leading. Obviously, the external environment has something to do with that from a short-term perspective.

It’s not just a short-term problem, however. GE’s answer to this crisis is the same as it’s been to everything else in recent years: to shrink. Its workforce fell 28% last year alone. Biopharma is just the latest in a series of asset sales. GE Capital has been — you guessed it — shrinking its balance sheet.

That’s a problem similar to that of Alcoa (NYSE:AA), another former Dow Jones Industrial Average component. But it’s not the only strategy a former titan can take. IBM (NYSE:IBM) looked to ramp its turnaround by acquiring Red Hat. It was a bold move that better positioned the company in the growing cloud space.

At this point, what markets are growing for GE? There are pockets in Power. Renewable Energy probably has a solid long-term outlook. So does most of the Healthcare business.

But even the ‘good’ markets aren’t that good. The more challenged businesses are under real threat. That’s been the core problem with GE stock for some time. First quarter results didn’t create that problem. They illuminated it.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

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