I’ve been a skeptic toward General Electric (NYSE:GE) stock for some time now. Truthfully, I’m not too happy about it.
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After all, General Electric once was one of America’s greatest and most innovative companies. It provided thousands of employees with stable jobs and generous retirement plans. GE stock was a core holding of pension funds and individual investors.
Sadly, that’s no longer the case. General Electric offers many fewer jobs: its workforce shrunk 28% worldwide in 2019. And GE stock, almost incredibly, touched a 29-year low this month. Its dividend has been cut — twice.
The reality is sad. But it’s still the reality. Investors need to react accordingly.
While I still hold out hope for General Electric, I can’t yet recommend that investors put their own hard-earned money behind the company’s turnaround plans. Two pieces of news this week show why.
GE Exits the Lighting Business
On Wednesday, General Electric announced that it had sold off its Lighting business. It is the end of era. After all, General Electric traces its history back to Thomas Edison and the light bulb he invented. That link has now been severed.
Perhaps more importantly, as Bloomberg noted, GE is no longer a consumer company at all. Many of us remember the company’s iconic “we bring good things to life” ad campaigns of the late 20th century. But GE Appliances now is owned by Germany’s Haier (OTCMKTS:HRELF). The lighting business was sold to privately held Savant Systems.
There’s more than symbolism to the deal, however. According to the Wall Street Journal, GE Lighting sold for just $250 million. Over half of that was assumed liabilities. And it came after GE spent years trying to exit the business, during which time it sold off its Current LED business and some overseas operations as well.
What the deal, and the process leading up to it, provides is another example that GE simply isn’t what it used to be. Older investors, in particular, may have a sense of General Electric that simply isn’t accurate anymore.
As I’ve written before, General Electric’s response to everything for years now has been to shrink. That process continues.
GE stock did rally 8% on the news, but that gain seems driven more by bottom-fishing on a green day for the market than the transaction itself. $250 million simply isn’t that material against a market capitalization still in the range of $60 billion. It’s obviously not enough to offset the concerns that are keeping GE stock well into the single digits.
Culp Speaks and GE Stock Falls
To be fair to GE, the decision to continually shrink the business isn’t necessarily the wrong move. Chief executive officer Larry Culp is widely respected after his enormously successful tenure at Danaher (NYSE:DHR), and with good reason.
But that’s precisely the point. If GE could grow, Culp would be trying to drive growth. But with the company beset by a still-troublesome balance sheet and significant pension obligations, the focus has to be on getting the company back on solid footing first.
The coronavirus has upended those plans. It has hammered GE’s Aviation business, which counts Boeing (NYSE:BA) as a key customer.
That in turn is testing investor patience. Culp said at a conference Thursday that GE would burn $4.5 billion in cash in the second quarter alone. GE stock fell 7% in response.
The issue isn’t just Aviation, but GE Capital. That unit finances aircraft, and as Culp put it “is seeing a good bit of pressure” from customer deferrals.
The weakness from aircraft isn’t ending in the second quarter. It’s likely not ending in 2020, or even 2021. An investor need only look at the share prices of American Airlines (NASDAQ:AAL) or Delta Air Lines (NYSE:DAL) to see what the market is pricing into those stocks.
There’s simply not that much slack in GE’s free cash flow profile right now to manage that kind of multi-year pressure. Even before the coronavirus hit, GE was guiding for industrial free cash flow (i.e., excluding GE Capital) of just $2 billion to $4 billion. If Aviation is down for the count, free cash flow stays flattish at best. And that leaves GE with little in the way of options.
A Tough Spot
The problem for GE stock at this point is that the company has to fix its balance sheet through free cash flow. It’s pulled all of the other levers.
Again, it’s sold businesses, including the $21 billion sale of GE Biopharma to Danaher that closed earlier this year. There’s really nothing left. GE Power is in the midst of a turnaround, Aviation is in trouble, Renewable Energy is small (and providing some growth), and Healthcare is the profit center.
Simply put, GE has to start making money. It’s not doing so. And, again, I don’t think that’s necessarily the fault of Culp. It’s largely the result of past decisions, among them the disastrous acquisition of Alstom that closed in 2015.
Whatever the cause, GE simply isn’t a leader anymore. It’s not a giant. It’s not an innovator. GE is not what it was. What the news from this week reinforces is that General Electric simply is a cash-burning company trying to turn itself around. And even in a best-case scenario, it likely has years left of work to do.
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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