It’s been an absolutely horrendous run for General Electric Company (NYSE:GE) stock. The GE stock price has fallen by over 50% just since June. And what’s truly incredible is that the decline in GE shares has been pretty much interrupted.
Save for a brief bout of optimism at the beginning of the year, General Electric stock has moved simply straight down for nine months.
All the while, investors have tried to time the bottom. Each time, they’ve been too early at best. With GE trading at its lowest levels in almost seven years, there’s little reason to step in now, either.
GE stock does look reasonably cheap, trading at less than 14x the midpoint of 2018 EPS guidance of $1.00-$1.07. But even that ‘cheap’ multiple suggests that GE will hit its guidance. It then requires that earnings will stabilize – and begin growing again relatively soon.
There’s little reason to see that combination playing out. If anything, recent developments suggest it’s going to get worse for GE before it gets better. I argued last month that GE stock easily could hit $10-$12, and I still believe that’s the case. GE is a knife that simply hasn’t stopped falling.
More Bad News for GE
In the wake of an awful 2017 and a surprise $6.2 billion charge in the reinsurance business, GE bulls argued that the bad news was priced into the GE stock price. That doesn’t appear to have been the case, however.
GE tried to get away from its financial business, spinning off insurance business Genworth Financial Inc (NYSE:GNW) and consumer financing firm Synchrony Financial (NYSE:SYF), as Aaron Levitt detailed last month. But GE Capital’s issues remain.
There was the $6 billion charge, which raises the “there’s never just one cockroach” risk. GE then disclosed in its 10-K that it could still face liability from subprime mortgage origination during the housing bubble.
So now, any sum-of-the-parts calculation for the GE stock price has to include some accommodation for potential, unknown, liabilities. And it’s not as if accounting concerns are coming out of the blue. A consistent divergence between earnings and cash flow has dogged GE stock for some time, leading to weakness after the Q1 report in April.
Is this the bottom for GE stock? It’s possible. But it seems unlikely. And it’s not clear why, exactly, the bottom needs to be timed here.
Given how steep, and how swift, the decline has been – General Electric has lost $140 billion in market capitalization in the last year, more than the enterprise value of Nvidia Corporation (NASDAQ:NVDA) – there will be time to catch upside should signs of a turnaround begin.
In the meantime, however, there’s the likelihood that GE gets removed from the Dow Jones Industrial Average – possibly to be replaced by Facebook Inc (NASDAQ:FB). There’s an ugly chart. And there’s the possibility of more bad news, or lowered full-year guidance with the Q1 report in April.
More broadly, this isn’t a matter of sentiment. GE has earned every penny of its decline. The argument that investors should buy “at the bottom” assumes the bottom is visible – or callable. It isn’t. But with what visibility we have, there’s little evidence to suggest that the bottom is in.
The GE Stock Price Isn’t Cheap
Admittedly, it isn’t necessarily over for General Electric. As Luke Lango pointed out, GE Aviation and GE Healthcare have real value. In GE’s shareholder letter, CEO John Flannery admitted to considering strategic options for the business, while denying those plans were part of a “break up”.
There may be some value here, but I’m not sure there’s much. A 14-15x EPS multiple relative to 2018 guidance sounds attractive. But GE’s cash flow guidance suggests an 18-19x multiple – a valuation that suggests reasonably solid, consistent growth.
Knock that back to 12-14x, and/or assume GE’s dividend yield goes back to 4%+ (as it was before the dividend was halved last year), and the GE stock price drops to the $10-$12 range.
That’s a potential near-term range for the stock, even if guidance is met and if there’s no more bad news yet to be released. Neither is guaranteed. At this point, investors would be better off waiting to find out that indeed is the case, even if it means buying GE stock a point or two higher.
As of this writing, Vince Martin has no positions in any securities mentioned.
