General Electric Company (NYSE:GE) requires patience, plain and simple. Investors must be willing to give the industrial conglomerate the time it needs to get out of its funk … but if they do, GE stock will pay off.
General Electric is now down about 13% year-to-date, versus a nearly 9% rise in the S&P 500 index. And if you held GE stock over the past year, you’re down more than 7% while the S&P 500 is up almost 20%.
Nevertheless, while the shares continue to trade below their 52-week high of $33 per share, there’s a little light at the end of what has been a dark tunnel.
How General Electric Can Shine
GE shares are up almost 4% higher than when I last recommended the stock, climbing on news that Jeff Immelt is no longer the CEO after more than 16 years at the helm. Immelt will be succeeded by John Flannery, the former president of GE Healthcare who has a strong track record of turning around businesses.
This leadership change, along with the value-creating closing of its mega-deal with Houston-based Baker Hughes Incorporated (NYSE:BHI), could prove to be the catalysts GE stock needs to earn back Wall Street’s trust.
Prior to the announced CEO change, GE stock was under pressure after the company missed its own cash flow projections in the first quarter by a whopping $1 billion. The company, which competes with the likes of Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX), has frustrated investors. Since Immelt first became CEO in Sept. 11, 2001, GE stock is down almost 30%, while the Dow Jones Industrial Average has surged 120%. All the while, competitors such as 3M Co (NYSE:MMM) have thrived.
Nevertheless, GE stock offers an attractive entry point for investors who value a strong 3.5% dividend yield.
To the extent Flannery can make the necessary cost reductions that Immelt was seemingly incapable of making, GE could command the same level of respect as Boeing Co (NYSE:BA). At the same time, Flannery can receive some relief from activist investor Nelson Peltz and his Trian Fund Management, who are pushing for significant changes at the board level.
Resetting GE’s Businesses
While Immelt was willing to fall on the sword, the board was complicit and had to sign off on all the failed growth strategies GE embarked on — including the company’s ill-timed decision to enter the financial space with GE Capital shortly before the global financial market collapsed.
Flannery will need to reset the business for growth expectations to become realistic.
With the company last quarter reporting negative cash flow from operating activities of $1.6 billion and forecasting cash flow to be negative $600 million for the current quarter, there’s still a huge disconnect between what General Electric is able to do and what the Street is looking for.
To that end, one of the first courses of action will be for Flannery to issue what he perceives to be realistic expectations and guidance, even if he has to significantly low-ball forecast for the next two quarters. Before GE stock will climb higher, however, the company must demonstrate that it can deliver on its cash flow projections, unlike the miss in the first quarter.
But I believe Flannery, even if he has to set the bar too low, will be given time, especially with the Baker Hughes deal — aimed at combining Baker Hughes with GE Oil & Gas — set to close later this year.
The combined entity will be called Baker Hughes, a GE Company, of which GE will own 62.5%. It will then be spun off as a separate publicly traded company. There’s no question this is a good move for GE, which has seen its oil and gas division hit hard from low energy prices. This merger will coincide with the recovery in oil prices and possibly an increase in capital spending from the oil and gas companies.
Bottom Line for GE Stock
Resetting analysts’ expectations can sometimes come at the expense of a higher stock price, meaning General Electric can fall if the Street believes the guidance is too low.
Still, this would be another buying opportunity in GE stock since it’s already trading on the assumption of little-to-no growth, at a forward price-to-earnings ratio of under 14. The average P/E for S&P 500 stocks is 19.
General Electric also just returned $4.4 billion to shareholders in Q1 through a combination of dividends and buybacks, and still is acquiring more of its own shares.
The company deserves more time to get its business back on track, as long as it’s demonstrating that it’s on the right path.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.