It’s been several days since General Electric Company (NYSE:GE) announced first-quarter earnings that exceeded analyst expectations on both the top- and bottom-line. GE stock gained about a dollar on the news, giving hope to long-time shareholders.
Naturally, those long GE stock consider this a sign that the company’s turnaround is gaining traction. CEO John Flannery said as much in the Q1 2018 press release.
“The first quarter is a step forward in executing on our 2018 plan and we are seeing signs of progress in our performance. Industrial earnings, free cash flow, and margins all improved year over year,” stated Flannery on April 20. “We reduced Industrial structural costs by $805 million and are on track to exceed our cost reduction goal of $2 billion in 2018.”
Take a bow, GE.
But, that doesn’t mean you ought to be considering buying GE stock if you don’t already own it. Here’s why.
GE: The 2008 Version
Corporate America was enduring one of the toughest years on record, with the S&P 500 down 37% and General Electric stock off by 53%. As the markets bottomed in March 2009, GE stock was yielding more than 7%. Not bad for one of America’s oldest and most iconic companies.
Before you run out today and buy GE stock because you think it’s a screaming buy, it’s important to consider a little perspective.
Flannery mentioned improving industrial earnings, free cash flow and margins in GE’s press release. Lets compare them to 2008’s first quarter results.
Industrial Earnings and Margins
In the first quarter of 2018, GE’s adjusted industrial operating profit was $2.7 billion, 15% higher than a year earlier on $27.4 billion in revenue.
In the first quarter of 2008, GE’s industrial operating profit was $3.4 billion on $23.0 billion in revenue. That excludes NBC Universal (which I don’t consider industrial); it had $712 million in operating profit on $3.9 billion in revenue.
So, from an operating margin perspective, the 2018 version of General Electric had 10.2% margins in Q1 2018. In 2008, they were 460 basis points higher at 14.8%. GE’s industrial businesses were generating greater profits in 2008 from less revenue.
Free Cash Flow
GE’s adjusted industrial free cash flow in the first quarter of 2018 was negative $1.7 billion, 39% less than a year earlier. On a trailing 12-month basis, free cash flow was $2.0 billion.
In fiscal 2008, General Electric had industrial operating cash flow of $16.7 billion. Subtract out $3.0 billion in capital expenditures and its industrial businesses generated $13.7 billion in free cash flow, or about seven times what it’s generating today.
Bottom Line on GE Stock
In 2008, GE traded at 0.9 times sales. In 2018, it trades around 1.0 times sales. By every metric, GE, the 2008 version, was cheaper than GE stock is today, yet it was far superior in terms of quality of earnings and cash flow generation than a decade later.
Here’s what then-CEO Jeffrey Immelt had to say about GE as it entered fiscal 2009.
“We expect 2009 to be extremely difficult. However, we have taken strong actions to prepare the Company, including strengthening cash flow and liquidity; managing costs; taking restructuring charges; intensifying risk mitigation; accelerating cycle of management reviews; and protecting revenue,” Immelt said in April 2009. “We ended 2008 with $172 billion of Infrastructure equipment and service backlogs. We have solid momentum in services, global growth and margins.”
Despite a fantastic 2008, Immelt was warning about a tough year in 2009. It materialized with revenues and earnings significantly lower year over year — and they’ve really never bounced back.
The turnaround of 2018 might continue, but General Electric is nowhere near the company it was in 2008. I wouldn’t buy GE stock until it showed some signs that it could be.
That’s not now.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.