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None of my analysis had to do with the coronavirus from China, which was just emerging. But of course, the world is much different now — and unfortunately, I still think investors should continue to stay away from GE stock.
Strong Leadership Isn’t Enough
It’s true that CEO Larry Culp has done a standout job since he took the helm in Oct. 2018. He is a proven leader who knows how to run complex organizations. Keep in mind that from 2000 to 2014 he was the CEO of Danaher (NYSE:DHR), which saw a five-fold increase in stock value during his tenure.
Culp’s leadership combines the right mix of strategic vision and understanding of the details. He also is a big believer in process methodologies, like lean, which allow for continuous improvement. Such strategies have their roots to the early days of Toyota (NYSE:TM).
While all this will be helpful, the fact is that it will not be enough. There are just too many serious issues facing GE stock right now.
After all, before Culp came on board, the company was in dire straights. GE posted major losses on the bottom line and there was a slashing of the dividend. In fact, the shares had to be delisted from the prestigious Dow. Note that all of this happened while the economy was doing quite well.
Now, Culp has certainly taken swift actions. He has continued to cut costs and unload various assets, such as from the medical business, to reduce the debt load. But this will probably not matter much either. If anything, Culp will need to take deeper actions — and fast. GE is particularly vulnerable as most of its businesses are cyclical, except for the healthcare segment. So as the world plunges into recession, the company’s cash flows will come under extreme pressure.
Granted, GE is expected to get $21 billion from DHR for the sale of its biopharma division. There is also about $35 billion in credit lines. In other words, GE should have sufficient liquidity. But there will still likely be losses across most of its businesses. The aviation engine business is certainly in jeopardy as world travel comes to a grinding halt. Boeing (NYSE:BA), of course, has already requested a $60 billion bailout for itself and numerous suppliers.
What’s more, even though GE has been shedding its energy assets, there is still exposure to this market. The company still has a 37% stake in Baker Hughes (NYSE:BKR). Since early January, the shares have gone from $25 to $9.84. And the Power unit, which has been recovering lately, will also like deteriorate. Consider that the business has been cash-flow negative.
The Bottom Line On GE Stock
Back on March 4th, GE put out guidance for its 2020 cash flows, which are expected to come in at $3 billion, compared to $2.3 billion last year. But this didn’t factor in the coronavirus impact. And in light of the wide-scale closures of businesses across the US and parts of Europe, it’s hard to see how this forecast could hold up. It’s also important to note that GE’s aviation engine business accounts for about 60% of industrial profits. Thus, the next couple quarterly reports could be fairly bad.
So right now — with all the uncertainty and the high exposure to economically sensitive parts of the global economy — there’s really no reason to buy into GE stock.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
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