The future of General Electric Company (NYSE:GE) has come into question as the magnitude of its financial troubles come to light. The stock has fallen by more than 60% from its 52-week high as the true nature of GE’s problems becomes known. Given the painful decisions required to solve the company’s problems, General Electric stock will likely fall further. Investors must decide if and when they should buy amid the company’s difficult restructuring.
On a personal note, GE was my first stock and fostered my love of the market. Early in the tenure of Jack Welch, I inherited two shares of General Electric stock upon my grandfather’s passing. It caught my attention over the years when repeated splits turned those two shares into 48 shares.
Selling those shares a few years ago was an emotional but correct decision as GE faces one of the greatest crises in its 100-plus year history. GE stock is the only original Dow Jones Industrial Average stock from 1896 to remain in the index. However, the recent performance of General Electric stock endangers that standing.
General Electric Stock’s Recovery Won’t Be Easy
I predict GE’s removal from the Dow Jones the next time the index changes components. The real question remains the company’s survival itself. Most of my colleagues remain skeptical. InvestorPlace.com analysts have treated readers to headlines such as “Not Worth Chasing,” “Dead and Never Coming Back,” and “Stays a Strong Sell” when it comes to GE stock.
To be sure, GE is where it is today because the “house that Jack built” became the structure that Jeff could not maintain. While one could argue that nobody could truly succeed Jack Welch, clearly Jeff Immelt ran backward with the baton that Mr. Welch handed to him. Now its current CEO John Flannery is working to again move the company forward.
A recovery will not prove easy. GE’s cash position declined by nearly $47 billion over the last three years. About $5.5 billion of that decline occurred in 2017. GE wisely cut its $8.65 billion in dividend payments in half amid the cash shortfall. It may need to cut the remaining half in its bid to return to positive cash flow.
A lack of tangible assets in general also speaks to its financial woes. As of the end of the last quarter, the balance sheet contained over $64 billion in stockholder’s equity. However, “goodwill” and “intangible assets” combined stand at about $102 billion. Bolstering the amount of tangible assets, especially cash, remains critical to saving GE.
General Electric Stock May Eventually Be a Buy
Although I recommended buying GE after a dividend cut, I made that call before the depth of GE’s problems had come to light. Today, I would describe General Electric stock a possible buying opportunity delayed. I agree with our own Josh Enomoto who stated GE “has potential for the gambler.” Warren Buffett expressed a similar sentiment, saying he’s interested in GE stock “at the right number.”
Causes to believe in an eventual recovery remain. First, the success of peers such as Honeywell International Inc. (NYSE:HON), Siemens AG, and to an extent 3M Co (NYSE:MMM) and United Technologies Corporation (NYSE:UTX) shows that GE’s core industries remain critical parts of today’s economy. On the whole, GE will not follow the lead of one-time Dow peer Eastman Kodak Company (NYSE:KODK), who saw its core product become obsolete. High-performing divisions such as aviation, healthcare, and power systems currently bolster General Electric stock.
Still, rebuilding the company around those divisions remains difficult and costly. Moreover, the sale of some divisions are unlikely to command top dollar. This includes the one-time symbol of GE, its light bulb businesses. Other light bulb companies have taken market leadership as LED lighting grows in popularity.
Bottom Line on General Electric Stock
Investors should view General Electric stock as a buying opportunity delayed. We now know that the dividend cut and the proposed asset sales may not be enough to save the company. It appears the company cannot afford what remains of its dividend.
Also, GE faces poor market conditions for the assets the company wants to sell. Still, its aviation, healthcare, and power systems divisions have performed well. If John Flannery can rebuild GE into a more focused company, investors could profit by buying into a smaller GE in the future.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.