General Electric Company Stock Is a Trade, Not an Investment
General Electric (NYSE:GE) has the distinction of being the worst performing Dow Jones Stock of 2017. It also has the honored distinction of being the worst performing Dow Jones stock of the last ten years. In fact, if it wasn’t for dividends, GE stock’s return would have been negative. That dividend, by the way, was cut twice during that time.
But as the saying goes, every dog has its day. And, so far, GE has been on a tear in the new year. For many investors, this could signal that the old Dow dog may finally be turning a corner and getting back to business.
Don’t be fooled.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
GE has a lot of warts — including some that are more structural than a simple spin-off or asset sale will fix. While General Electric may be bouncing, the longer term picture is still pretty murky.
Some Nice Gains for GE Stock
GE stock seems like a new animal this year. Last year, the industrial firm managed to sink by a whopping 45% on the back of poor earnings, bad business decisions and other major missteps. This year, it seems like a complete reversal of fortunes. While 2018 is still young, GE stock is up by about 6%. That’s an impressive gain for a stock that was knocking on death’s door. And, with that gain, many people are starting to wonder if GE stock’s worst days are behind it.
Well, the answer isn’t so simple and still tilting towards “no” in a big way.
For one thing, the main reason for GE’s tumble is still there. The issue? Its main businesses are starting to see some big decreases in their revenues and sales. The biggest of which is its power business.
GE paid a lot of money for or France’s Alstom Power back in 2015 — $10.6 billion, in fact. That was General Electric’s largest industrial deal ever. On the surface, it looked good. Alstom was a huge player in gas turbines, hydro-electric energy and grid solutions. Its products meshed well with GE’s own power unit and, according to GE at the time of the merger, the energy-grid businesses alone would generate roughly $6 billion in annual revenue. The renewable energy combination would pull in about $3 billion in yearly sales.
Unfortunately, none of that has actually happened.
GE has had a hard time making the acquisition work and part of the reason is that demand has been falling off a cliff. As reported in its latest investor update, GE only plans on shipping around 65 to 75 heavy-duty gas turbines this year. That’s about 30 to 40 less than it sold last year. That, in of itself, was lower than its initial estimates of around 160 units shipped in 2017. The numbers are similar for a variety of power products in GE’s line-up.
Even renewable energy is seeing a slight decline — which is odd since solar and wind products should be growing if utilities aren’t using gas or hydro-electric resources to generate power.
What it really means is that demand just isn’t there. And that’s a huge problem for a business that is the major contributor to overall earnings.
Predix Isn’t Helping General Electric Either
GE’s ace in the hole was to be its industrial internet of things (IIoT) software Predix. And, by and large, Predix has been a hit. But even here, GE is starting to see some major cracks in its industrial armor.
Tucked away in the dog days of summer, the dog of the Dow reported that it was lowering its revenue targets for Predix and its digital unit by about $3 billion. GE Digital continues to suffer from problems and new CEO John Flannery is considering expanding partnerships with “real” tech companies or even selling a stake in the unit to raise money/cut costs.
GE coined the phrase the “industrial internet” and “digital factory.” However, it’s rivals, such as Honeywell (NYSE:HON) and United Technologies (NYSE:UTX), haven’t had similar problems with their IIoT units. Sales here are booming. For GE, this is another big black eye.
GE Stock Could Be a Value Trap
So, while hope of a turnaround is pushing up shares of the industrial giant, there are still plenty of problems facing GE. Two of the biggest are structural in nature. Spinning off oil and gas assets or locomotives isn’t going to fix the problems at its biggest business unit or its potentially fastest growing one.
To that end, GE stock could be nothing more than a trade at this point.
With the stock reporting earnings near the end of January, the trade might unwind rather quickly. We’ll get to see how badly, power and Predix are doing. I suspect, based on demand and lowered expectations, not that good.
And that could mark the end of the General Electric trade and GE’s return to the bottom of the Dow Stock pile.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
More From InvestorPlace
Comcast Corporation Is a Reliable, and Reasonably Valued, Growth Stock
Caution! Mondelez International Inc Stock Masks Underlying Trouble
The post General Electric Company Stock Is a Trade, Not an Investment appeared first on InvestorPlace.
