The horrible slump for General Electric Company (NYSE:GE) drags on. GE stock is down almost 50% over the last 12 months, and 2018 hasn’t improved General Electric’s fortunes. The stock is down another 13% year-to-date and hit new seven-year lows last week, breaking below the key $15 psychological level.
After sliding to as low as $14.23 during Friday’s morning plunge, GE stock has started to stabilize along with the market and closed back near $15 on Friday. While there are no guarantees, the chart looks like that might have been a meaningful bottom that will propel the stock higher going forward.
Why GE Stock Continued To Sink
GE stock fell in December, presumably on tax-loss selling, but rallied sharply to start 2018. It appeared that the worst was over. However, Jan. 16 restarted the downtrend. On that day, General Electric admitted that its insurance unit ran more losses than it had anticipated. It is taking a $6.2-billion charge immediately and will be adding $15 billion to reserves to cover for this shortfall over time.
As you might expect, GE stock started to slump again as investors asked what other hidden dangers might be out there. The next shoe fell quickly, with the SEC announcing an investigation into General Electric’s insurance unit. After that, analysts downgraded General Electric stock left and right. On top of that, the SEC probe expanded, focusing on GE’s power unit as well.
Then, analysts started to suggest that GE stock would be kicked out of the Dow Jones Industrial Average and associated ETFs such as SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) which manage substantial sums of money.
If GE stock is kicked out of the index, it would be a big blow to the company’s reputation and also cause forced mechanical selling of its stock out of index funds.
To Split Up or Stay Together?
The final piece of the rally and subsequent drop in GE stock came due to speculation over the company’s future shape. Since the financial crisis, the company has been furiously unloading many of its business divisions.
Most notably, it has dumped GE Capital and gotten out of financial businesses. Given the recent losses in insurance, investors can only wish that General Electric had acted even faster on this front.
In any case, General Electric may make the ultimate move as far as breaking up goes. In January, widespread media reports suggested that General Electric may split up into a bunch of independent businesses. GE stock is clearly getting no benefit for being a large conglomerate at this point. At this point, the individual segments are probably worth more than the whole business as a unified entity.
To that point, GE CEO John Flannery suggested that the company was exploring various options, “including separately traded assets.” That sent GE stock up and got analysts thinking.
However, the company’s head of aviation services doused some water on this idea, subsequently saying that GE is considering: “different structuring alternatives, not breaking up the company — and there is a difference.”
A Breakup Is Likely Coming
Regardless, General Electric has destroyed so much shareholder value that you have to imagine all options are on the table. If GE’s management can’t right the ship — and soon — expect for activist investors to do the job for them. Long-suffering GE stockholders would likely vote to break up the company if given the chance.
While not all of GE’s units would prosper as standalone entities, enough would that overall a breakup would be a highly successful action.
Sure, GE Capital’s major failings damaged the company’s reputation on a corporate level. But GE’s individual business arms are among the best in their categories across a wide portion of the industrial economy. Getting out from under an increasingly toxic General Electric parent could unlock a great deal of value.
Now analysts are suggesting that a breakup would be difficult. This is due to GE’s ongoing pension shortfall. Bloomberg explained that:
“[A]t a time when General Electric Co. is facing what amounts to an existential crisis, a $31 billion deficit in its pension plan may complicate any turnaround that involves a breakup of the 126-year-old icon of American capitalism. Divvying up the obligations won’t be easy. After all, GE owes benefits to at least 619,000 people. And retirees aren’t the only ones at risk […] GE’s pension deficit has gotten so big, a misstep could risk leaving the separate units with commitments they ultimately can’t afford to pay.”
GE Stock: Try to Look Past the Negatives
The skeptics could be right. Perhaps the company’s pension problems are simply too big. But, in general, where there is a will, there is a way. The company desperately needs to do something to recover lost shareholder value.
At the same time General Electric stock has mercilessly slumped, its peers have soared. Other leading American industrials such as Caterpillar Inc. (NYSE:CAT), United Technologies Corporation (NYSE:UTX) and Honeywell International Inc. (NYSE:HON) are all up 50% or more since the 2016 lows. Meanwhile, GE stock is down 50% over the same period.
None of this can excuse the Immelt era. Old management got General Electric into a heap of trouble. But the market is now pricing the firm for ongoing woeful performance. Even the word “bankruptcy” is now being tossed around. Analysts are rushing to see who can downgrade the company fastest.
All that despite the company reaffirming 2018 profit targets and exploring financial options such as a corporate breakup to get the company’s assets back up toward fair valuations. GE stock is risky, but upside is high for when sentiment turns. I’d rather take a chance here than pay record-breaking high PE ratios for peers such as Caterpillar.
At the time of this writing, the author owned UTX stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.
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