General Electric Company (NYSE:GE) made its name as a lighting company and morphed into an industrial conglomerate. Now it’s trying to change its image by selling aspects of both its signature businesses. GE stock investors are waiting to see if the moves can stem the 23% loss in share value they’ve suffered so far this year.
GE this week agreed to sell its industrial-solutions business to Switzerland’s ABB Ltd (ADR) (NYSE:ABB) for a cool $2.6 billion. The move comes on the heels of the company’s decision to sell its light bulb business, and amid plans to shed its fleet of corporate jets. It’s all part of new CEO John Flannery’s sweeping initiative to cut costs — $2 billion by the end of 2018 is his plan — in an effort to shore up its profits, which fell 53% in the second quarter.
Will it work? Perhaps. So far, however, those suffering GE stock investors aren’t convinced.
GE Stock Down Under Flannery
Since Flannery took over for embattled former CEO Jeff Immelt on Aug. 1, General Electric stock is down 4.8%. During that time, the S&P 500 is up 1.2%. Meanwhile, average volume in GE has slipped from what it was in June and July. Flannery may be giving Thomas Edison’s company the cost-saving facelift it so desperately needs. But none of his moves have inspired a wave of buying on Wall Street.
Chances are, investors are waiting to see if all of Flannery’s cutbacks make a difference in the bottom line. Third-quarter results, due out Oct. 20, are expected to be much better (+56%) than the second quarter, though full-year EPS estimates (+4.7%) remain rather modest. If the company exceeds either figure, it will be the first hard evidence that Flannery’s plan is actually working. That could inspire some buying.
Even with an earnings beat, however, I doubt there will be an overnight rush to buy GE stock. The stock has looked like a sinking ship for a while now, shedding a quarter of its value since last July. And in the meantime, the company has been in the throes of a full-on identity crisis. It so wants to be an industrial conglomerate with a focus on tech, but it’s more known for things like aviation, oil and gas and healthcare.
In essence, GE has become a jack-of-all-trades, master of none.
As a result, investors have ditched GE in favor or more-focused companies that dominate a specific field — like, say, Netflix, Inc. (NASDAQ:NFLX) or Facebook Inc (NASDAQ:FB).
As the recent fat-cutting measures indicate, Flannery is making strides to make General Electric a more-focused, efficient company. But a full turnaround will take years. Restoring GE’s image on Wall Street could take even longer.
Avoid GE Stock… for Now
So while its new CEO isn’t wasting time getting to repairing GE’s problems, particularly with efficiency and profit growth, complete buy-in from investors will be incremental, not immediate. In the midst of a bull market that hasn’t truly slowed in nearly 11 months, there are better places than GE stock to invest your money if you want growth.
Sure, a couple of earnings beats could alter that narrative. But for the time being, Wall Street is taking the wait-and-see approach with GE stock. You should, too.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
