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GE’s Progress Doesn’t Mean General Electric Stock Is a Buy

Analysts typically rate stocks “buy,” “hold” or “sell,” or some derivatives of those adjectives. “Progress,” however, is not an analyst rating. If it was, General Electric (NYSE:GE) would be a screaming “progress.”

General Electric (GE) Stock Is a Redemption Story That Will Take Awhile
General Electric (GE) Stock Is a Redemption Story That Will Take Awhile

Source: Shutterstock

Last week, the company reported  second-quarter earnings per share, excluding some items,  of 17 cents on revenue of $28.83 billion, beating analysts’  average estimates of 12 cents on sales of $28.68 billion.

The company also boosted its full-year EPS guidance to 55 cents to 65 cents, up from its previous guidance of 50 cents to 60 cents. General Electric stock promptly rewarded investors with a six-day skid.

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GE stock price is up about 50% from its 52-week low, and earlier this year, General Electric stock was more than 80% below its all-time high. Those stats indicate investors can either say that the easy money has already been made or believe that there’s more easy money to come in General Electric stock.

Sell-side analysts are sharply divided on the outlook of General Electric stock.

“Half of the analysts covering the company rate shares a Buy, with an average price target of more than $15 a share, according to FactSet. Analysts with a Sell rating have an average target price closer to $5 a share,” according to Barron’s.

Oil Woes

While General Electric is a smaller company today in terms of  number of operating units than it was 10 or 20 years ago, it’s still a sprawling company with  many businesses that can help or hinder the performance of GE stock price. With oil prices tumbling, General Electric stock is vulnerable because of the company’s exposure to the oil-services sector.

Oil prices trended higher earlier this year, providing a tailwind for General Electric stock.  But the primary customers of GE’s oil & gas unit are oil services providers and exploration and production firms At the moment, those are not healthy industries.

In 2019, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) and the VanEck Vectors Oil Services ETF (NYSEARCA:OIH) are lower by 17.60% and 13.47%, respectively. Additionally, the expected growth of global electric-vehicle demand is a major headwind for the oil patch and its vendors, like GE.

By some estimates, oil needs to fall to $20 per barrel to be competitive with electric vehicles. If oil falls to $20 per barrel, some of GE’s oil and gas customers will probably go out of business.

Of course, not all of GE’s issues are oil and gas-related. The company’s Power unit took a $22 billion write-down, leaving it with no goodwill.

“GE Capital, furthermore, remains an overhang on the stock, particularly related to its insurance liabilities, as well as required additional capital contributions from industrial GE,” said Morningstar in a recent note. “We estimate these contributions amount to a run-rate of just over $1.3 billion from 2020 to 2023, after an additional $2.5 billion contribution in the latter half of 2019.”

There’s A Bull Case on General Electric Stock, Too

It’s not all gloom and doom for General Electric stock. The company’s Aviation business, likely its best-performing unit, remains sturdy. And even after GE agreed to sell its biopharma unit,  the owners of General Electric stock should be excited about GE’s healthcare business.

“Our experts inform us that GE and Siemens are (usually) the only two vendors actively considered by large hospital networks,” according to Morningstar. “As such, we assume GE can relatively maintain share on the strength of new product introductions and its installed base,” it stated.

GE’s earnings quality is improving, but in order for GE stock to justify  the current consensus price target of around $11, the company probably needs to report EPS north of 60 cents for 2019. That’s above the low end of its guidance.

As of this writing, Todd Shriber does not own any of the aforementioned securities.

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