It’s not a good time to be a shareholder in General Electric Company (NYSE:GE). GE stock continues to free-fall and the hope is that it’s putting in some sort of bottom near $20.
General Electric stock has failed to hold major support twice now. GE’s earnings report was just too much — it put many shareholders over the edge. Maybe it’s the capitulation we’ve been waiting for, but perhaps there’s more downside left.
Ugly GE Earnings
Put simply, General Electric earnings in mid-October were not pretty. GE beat on revenue estimates, but earnings of just 29 cents per share came in woefully below analysts’ estimates of 49 cents.
Further, it cut the full-year guidance range down to $1.05-$1.10 per share, down from a previous $1.60-$1.70 per share. Given that it just reported third-quarter earnings, that tells us how bad its fourth quarter is going to be. Finally, management finally admitted the GE dividend is up for review.
We highlighted the dividend worries too many times leading up to its earnings. Management told us over and over that the dividend was a priority. That didn’t mean it was safe and we noted that several times. We pointed to the stressed look of its operating cash flow and free-cash flow as well. And as much as it sounds like some solid back-patting going on, that’s not the case. Trust me, I’ve blown plenty of trades down the line.
But the dividend issue should be no surprise to investors because it was so disappointingly apparent. General Electric has an investor meeting on Nov. 13, where we should get an update on its business and what’s going on with the dividend.
Should GE maintain its dividend, we’re looking at a near-5% yield. That’s unlikely and several analysts have suggested a roughly 25% to 40% reduction.
General Electric Stock to $17?
JPMorgan analyst Stephen Tusa has been very consistent in staying ahead of the GE stock decline. He cut his price target ahead of earnings to $20 and again after, now down to $17.
Tusa lowered his target on the assumption of lower Power profits and “higher accounting-change headwinds.” The latter seems likely given the complicated web GE has woven. Tusa cut his 2018 earnings per share estimates to $1.05 from $1.15, a nickel below consensus. His 2018 midpoint ($1.10) comes within the current guidance range for fiscal 2017. In fiscal 2019, Tusa is looking for earnings of $1.15 to $1.25. So basically, little to no growth from 2017 to 2018 and slight growth from 2018 to 2019.
Now trading at 17.3 times forward earnings and 24 times its trailing earnings, GE stock isn’t exactly cheap. Because estimates keep coming down and its current results are missing the mark, GE stock is remaining expensive. 17 times forward earnings for a stock with no earnings growth over the next 15 months and a dividend that might be on the chopping block? Ouch.
It just makes names like Honeywell International Inc. (NYSE:HON), Boeing Co (NYSE:BA) and United Technologies Corporation (NYSE:UTX) look even better.
Trading GE Stock
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GE stock is down almost 18% over the last month and just over 36% so far this year. There will be value in General Electric at some point, but at what price will that be? Many thought Under Armour Inc (NASDAQ:UAA) was in “value territory” between $18 and $20 because it had fallen so much. Well, surprise! Fundamentals didn’t improve and shares are now trading with a $10 handle. Could GE wind up the same way?
Given that GE is profitable and pays a dividend — and to our knowledge, will continue paying something — I don’t think it will get hit as hard as UAA. But the end might not be over. It really depends on this meeting in a few days.
On the weekly chart, we said we could buy at support No. 1, near $25. If the level failed, look out, because No. 2 was in play at $21.50. Both levels failed and now GE stock is clinging desperately to support No. 3. Each of these failed support levels gave investors plenty of time to stop out for minimal losses. Although, it doesn’t look that way because we’re using a weekly chart above.
You can see $17 all the way down there at the bottom. If it gets there, it will mark a massive decline in GE stock price, another 15% from current levels. The key will be to see if this current level holds near $20. If not, brace for impact.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
