Why General Electric Company Stock Isn’t a Value Play Yet

Look beyond GE stock for industrial plays

By Aaron Levitt, InvestorPlace Contributor

With GE Stock at Nine Year Lows, Is It Time to Buy the Dip?

Source: Shutterstock

To say that General Electric Company (NYSE:GE) is now one of the “Dogs of the Dow” would be an understatement. Shares of GE stock are down a staggering 44% this year. That’s due to plenty of failed execution attempts, dwindling cash flows and a painful dividend cut. Because of that big drop, many value investors have begun to circle GE stock.

Don’t fall for it.

GE is a wounded horse. And while its restructuring efforts may eventually bear some serious fruit, there are many top industrial plays that are already kicking it into high gear. For investors, placing their chips in one of these stocks — even if they have been rising over the last few years — is still a better bet than GE at this point.

Don’t be fooled, GE stock is no value yet.

GE Has Just Been Terrible

That 44% decline for GE does hurt, but it’s really a scratch on the surface when you look at its long-term underperformance. Over the past 10 years, GE stock has been the worst-performing stock in the Dow Jones Industrial Average and has underperformed the S&P 500 by a mile.

If it wasn’t for its dividend, GE stock would be negative over that time frame. And we know what has happened to that dividend payout.

A lot of GE’s problems could be blamed on former CEO Jeffery Immelt. Immelt did a pretty bad job of doing deals during his tenure. That included loading up on oil and gas assets at the top and selling its appliance division at the bottom just as demand for washing machines/fridges was rising. Even dumping GE Capital and NBC in order to focus on industrial activities was made at the wrong time.

And as for those industrial activities, the recent 12,000-employee layoff at its Power Systems division underscores that GE paid too much — $10 billion plus debt — for France’s Alstom Power back in 2015.

With that, new CEO John Flannery has come in and recognized the problems with GE. The issue is that the problems may be too deep for a quick turnaround.

GE’s Gas Nightmare

Take a look at the power division for example. Shipments of gas turbines are slipping pretty fast.

During its latest investor update, GE estimates that it will ship 65-75 heavy-duty gas turbines and 40-50 units of its advanced gas path equipment. That’s down from about 105 and 90 units, respectively, sold/shipped this year. Demand for smaller gas turbine equipment and services has also started to drop.

By the way, GE estimated that it will ship about 160 heavy-duty gas turbines at the start of 2017. Demand is simply dropping. That’s a huge issue as the power segment is GE’s largest.

Clipping that demand has been the availability of renewables and grid-storage options. And yes, General Electric is a leader in wind turbines and a growing player in hydroelectric power generation. But despite the recent major jump in operating profits at the division, GE Wind is still a drop in the bucket when looking at the rest of its gas turbine and power segments.

All of this has plagued GE’s cash flows. Industrial cash flow from operating activities has been steadily falling since the recession. Including deal taxes and pension contributions — because GE still has to pay them — cash flows at the firm were about $11.4 billion in 2012. General Electric should have about $5 billion at the end of 2017.

However, next year, GE estimates that number drops to about $3 to $4 billion, which is still less than it needs to pay its new lower dividend payout. This helps explains why GE is looking to dump its lighting, transportation and industrial solutions businesses.

And not that GE needed another hit, but that industrial solutions business is currently being offered to ABB Ltd (ADR) (NYSE:ABB) at less than its annual sales.

With its biggest revenue generator suffering and cash flows being low, GE and its management team really have their work cut out for them.

Look Beyond GE Stock for Industrial Plays

The truth is GE has been pretty poorly run since the end of Jack Welch’s tenure. All of these problems aren’t exactly easy or quarterly fixes. Some analysts have even postulated that it could take years for GE to sort them out. That makes GE stock’s current value price less tantalizing.

After all, why would you want to wait when you have industrial giants like 3M Co (NYSE:MMM) or Honeywell International Inc. (NYSE:HON) who aren’t suffering the same sort of cash flow degeneration as GE?

Meanwhile, their major revenue generators are featuring long-term rising demand. Honeywell’s aviation unit continues to see rising backlog and orders from both Airbus and Boeing Co (NYSE:BA). And these are just two examples.

The point is, GE has a lot of issues, and while it may seem like a value today, waiting for that value to be realized is going to cost investors a ton of potential gains. It’s better to look elsewhere for gains.

Disclosure: None

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/why-general-electric-stock-isnt-a-value-play-yet/.

©2018 InvestorPlace Media, LLC