After reporting fourth-quarter earnings, General Electric Company (NYSE:GE) was on the move higher Wednesday. However, after digesting the conference call and hearing what management had to say, GE stock wasn’t rallying. In fact, it ended down almost 3% in Wednesday’s trading session.
GE Earnings
It wasn’t a great quarter, but there were bright spots. The aviation and healthcare divisions did quite well. The company eliminated $1.7 billion in structural costs, ahead of its $1 billion target. Management is looking to take out $2 billion in costs this year. Full-year operating cash flow came in at $9.7 billion, much better than the guidance calling for roughly $7 billion. Finally, management reaffirmed 2018 guidance, looking for earnings per share of $1.00 to $1.07.
Now for the bad. GE missed on earnings per share and revenue expectations for the fourth quarter, while power profits plunged 88%. Sales of $31.4 billion were more than $2.6 billion below estimates.
The biggest issue, at least for me, came from the Securities and Exchange Commission.
The SEC is “in the very early stages” of its investigation, CFO Jamie Miller told investors on the conference call. The investigation involves the $6.2 billion charge the company took just last week, which hammered General Electric stock from $19 to $16 ahead of earnings. Further, we’re still waiting for GE’s restated financials, thanks to new accounting.
Although we feel better about the cash position, management was clear that we’re not out of the woods quite yet. Does this mean the dividend is safe? The 50% cut in November was more than just about anyone was looking for. I suspect management gave themselves some wiggle room with hopes of not cutting it again.
Full-year revenue fell year-over-year, while estimates call for about flat earnings growth from 2017 to 2018. There are questions swirling over whether GE will break up and what the SEC will conclude.
The biggest problem is we don’t know if the worst is over — and that’s saying a lot.
Trading GE Stock
Even though the recent bounce makes investors feel that they have to chase GE, that’s not the case. We pointed this out a few weeks ago too when investors felt the same way. Then the $6.2 billion charge knocked General Electric stock to new lows.
I didn’t like the quarter. The outlook was fine, but there’s a lot of question marks surrounding GE at the moment. Given those question marks, one must ask, how much is this company really worth? Particularly when we can be long stocks like Boeing Co (NYSE:BA), United Technologies Corporation (NYSE:UTX), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT) or 3M Co (NYSE:MMM).
GE stock trades at about 16 times forward earnings. With the latest decline, GE is back near a 3% dividend yield. The valuation, arguably, is still too high but it’s at least more reasonable.
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In my mind, General Electric stock is sort of in no-man’s land. Investors would rather pay a premium for a higher-quality company than dip down to buy GE. At the same time, its valuation is still too high and it has too many problems for me to consider it a value stock. Heck, Apple Inc. (NASDAQ:AAPL), one of the best companies in the world, has a lower forward earnings valuation. Why buy GE when you can buy AAPL for cheaper?
If GE takes out its recent low near $16, it could fall to $15 before exhausting. We are using a 10-year weekly chart, where $15 looks like some decent support. That level should at least be good for a bounce.
Bottom Line on GE
I want to see how GE stock handles its recent lows. Does it act as support or give way to new lows? A 3% yield is enticing, although a bit untrustworthy, given the financials. I also don’t like SEC investigations.
That said, I think CEO John Flannery is the man to lead the return. Insiders have bought in the not-too-distant past and he was not at the helm during GE’s lead up to the fall. I think he can turn GE around, but we need the stock to act better before buying.
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.
