General Electric Company (NYSE:GE) has had a difficult 2017 so far. GE stock is the second-worst performer in the Dow Jones this year, with only Verizon Communications Inc. (NYSE:VZ) seeing a bigger decline, and the seat of General Electric CEO Jeffrey Immelt keeps getting hotter.
Our own Dana Blankenhorn argued in April that it was time for Immelt to go, and activist Nelson Peltz may make his voice heard relatively soon.
Earnings growth has been minimal, even considering a reasonably strong first quarter. For good reason, investors have lost trust in General Electric.
I don’t see that changing anytime soon, nor do I see a six-month low for GE stock as a buying opportunity. Some investors, however, do see a turnaround opportunity in General Electric.
Admittedly, the company has made substantial efforts on that front. But there are just too many problems to consider in GE stock, even at what appears to be an attractive price. In fact, there’s plenty of reason to believe that price will get even cheaper.
The Heavy Lifting Is Done
Turning around a large company often is equated to turning around a battleship. Yet General Electric has made progress toward its turnaround, even if it’s admittedly taken a while.
As CNBC pointed out, 65% of the revenue generated by GE when Immelt was hired has been divested. GE has sold off nearly $200 billion worth of assets that underpinned the GE Capital division. The appliance and water units have been sold as well.
And GE hasn’t just shrunk. The company is trying to acquire oil field services play Baker Hughes Incorporated (NYSE:BHI) and already made a $10 billion deal to buy Alstom’s power division. General Electric has aggressively tried to move into software and the “Internet of Things”. Restructuring efforts have continued: Immelt said on the first-quarter conference call that GE would take $1 billion in costs out in both 2017 and 2018.
All told, there’s been a substantial amount of activity. But it hasn’t done enough for GE stock, which has underperformed the S&P 500 over pretty much every time frame over the past decade. And the primary concern at this point is: what’s left?
There simply aren’t easy levers to pull. The “new” GE looks much like General Electric will look for the next five years. But clearly that business isn’t enough to get investors jumping into GE stock.
How GE Stock Moves Higher
That raises the question of what catalysts are left to drive GE stock higher. Current earnings growth isn’t that impressive. While “industrial operating plus verticals EPS,” the company’s non-GAAP figure, rose 14% in 2016, half of that came from the company buying back shares. Organic revenue for the year was flat, with margins falling despite cost cuts.
General Electric continues to target $2 in EPS in 2018, but just one of 15 analysts believe the company can hit that bogey. Meanwhile, many of those analysts continue to critique the company’s earnings quality. One reason GE stock fell after what looked like a strong first quarter was that earnings and cash flow diverged — a common problem for GE of late.
That, in turn, leads to the perception that earnings are being somewhat managed. And cash is the most important issue here. It’s needed to pay dividends, and a cut would be catastrophic for GE stock. And it’s needed to fund share repurchases to create some of the EPS growth the business isn’t creating on its own.
That seems to leave GE reliant on new initiatives like digital and IoT. But there, the company will compete with everyone from Alphabet Inc (NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) to a range of Silicon Valley startups. There simply isn’t a lot of reason to get excited about GE stock without real, sustainable earnings growth. And there’s not much evidence to suggest that earnings growth is on the way.
Is General Electric Stock Out of Ideas?
So what’s left for General Electric? The business seems to be where Immelt wants it — but it’s not good enough. A Trump Administration infrastructure plan could help. But corporate tax reform actually could hurt GE stock, given an already “inexplicable” tax rate in the low double-digits. A 3.4% dividend helps, but that yield can be found elsewhere.
Add it all up, and General Electric is a low-growth company with serious trust issues. That’s not going to be enough to move GE stock higher. And with so much work done already, it’s not clear there’s anything left to drive real upside.
As of this writing, Vince Martin has no positions in any securities mentioned.
