I could say that the former CEO of General Electric Company (NYSE:GE), Jeffrey Immelt, has got to be crazy if he thinks anyone believes the story that an empty private jet would tail his plane wherever he went. That, however, is really just emblematic of why GE stock has felt like it’s been resting on its laurels during his tenure.
No, the real reasons why GE stock is a mess are in its earnings report from a few days ago. I’m going to show you why GE stock is no longer a stock to own, even if you purchased it decades ago and are sitting on big capital gains.
GE Stock Estimates Shortcomings
GE stock missed estimates in the last report that was the biggest since 2000. The expectation was for GE stock to hit $0.49 per share, but instead it came in at $0.29. There were massive restructuring charges, and after factoring those in, EPS fell 9% year over year.
This was the result of revenue, profit, and margin flops all over the place. Back in Q1, revenues rose a measly 1%, and Q2, revenues were down 2%.
At first glance, revenues appear to have risen 10%, but that’s because of the contribution from the Baker Hughes merger. Without it, revenue was flat. A sizable profit last year of $350 million not only evaporated, but the segment posted a $36 million loss. Meanwhile, the equipment segment revenues saw a 10% revenue decline. On the power business, GE profit caved by 50%.
What concerns me is that this doesn’t appear to be cyclical. Other industrials are doing rather well. Instead, it seems to me that this is structural. That is, it’s a GE problem.
There is a deeper systemic problem that results from these poor results: cash flow. Cash flow is probably the single most important element I look at in any company’s financials. A company can be struggling yet still generate ample cash flow. Yet GE has gotten so large that, even though it generates good cash flow, “good” isn’t good enough.
GE stock generated $1.6 billion in operational activity cash flow in Q1. Yet the new CEO insisted that GE should generate $12 billon for the rest of the year. Well, now that number has fallen to $7 billion. Based on historical capex levels of $4 billion, I’m pegging free cash flow of $3 billion for the year.
And the problem is that dividend payments run $8.8 billion.
The Bottom Line on GE Stock
Now, that’s not a disaster, even if this happened for a couple of years. GE has over $90 billion of cash on hand. The problem for GE stock price is that GE stock is considered a blue chip, and has a safe dividend yield 4.50%. It leads investors to question how long reduced cash flow will be an issue. CEO John Flannery says that GE will aim to increase cash flow, but there are two issues sticking with this claim.
The first is that, as mentioned, the power and oil/gas business is struggling. The other is that he plans to sell some $20 billion worth of assets. That means fewer assets to produce cash flow.
Going forward then, it seems to be that GE is in need of a complete and visionary reorganization and turnaround. That’s like turning around the Titanic.
GE isn’t going bankrupt, but I don’t see it going anywhere for the next few years, which I think leads to a depressed stock price. I think there is a danger of a dividend cut, which would result in tons of funds kicking the stock out of their holdings.
I see no reason to buy or hold GE stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com
