General Electric (NYSE:GE) has recently become a story of one shoe after another dropping. The bounce that GE stock received after its removal from the Dow Jones Industrial Average appears to have run its course. Now, as the Boston-based conglomerate prepares to announce earnings, unwelcome surprises with GE Capital have come to light. This could explain why GE stock is so low. The earnings report should give more insight on whether GE continues on the road to recovery, or if GE Capital forces more shoes to drop.
Report Will Likely Hinge on Non-Earnings Issues
The company reports earnings on Friday before the bell. Analysts expect earnings for the second quarter at 18 cents per share, down from 28 cents per share in the same quarter a year ago. They also expect revenues to shrink to $29.25 billion. This would represent a slight drop from the $29.58 billion figure seen in the same quarter one year ago. The company beat expectations on both earnings and revenue in the previous quarter. They could produce a surprise again.
Still, the most noteworthy surprises may not come from the financials. Nearly one year after taking the helm at GE, revelations on the true financial condition of the company has rocked John Flannery’s tenure as CEO. So far, shareholders have endured a dividend cut and removal from the Dow index after more than 100 years. Flannery has worked to redefine GE as purely a power and aviation business.
GE Capital Continues to Yield Negative Surprises
However, continuing revelations seem to reiterate why GE stock is so low. Just when Wall Street starts to believe that GE’s has uncovered all of the company’s problems, more surprises seem to appear. The latest crisis comes from fallout from the company’s finance unit, GE Capital.
However, a looming Justice Department probe lingers, and this may also help explain why GE stock is so low. Questions remain over some of the practices regarding its former subprime lending business. This has delayed the further sale of GE Capital. Also, the remaining parts of that unit continue to yield unwelcome surprises. The latest setback came from a $15 billion pledge to its insurance business — Flannery pledged $3 billion in cash to GE Capital.
One question sure to come up in the earnings report on GE stock regards this $3 billion pledge. With the $15 billion in costs, some analysts have questioned whether that figure will have to go higher.
GE Capital once accounted for about half of the company’s profits. However, the financial crisis exposed a portfolio of bad loans that nearly brought down GE following the crisis. Former CEO Jeff Immelt sold off most of GE Capital. Flannery has made it clear he wants to further shrink finance to a unit that helps bankroll sales in its core power and aviation businesses. This should mirror the finance operations of peers such as United Technologies (NYSE:UTX).
Stockholders Should Prepare for More Negative News
Another dividend cut could become the next shoe to drop. With the surprise costs coming out of GE Capital, fears abound that GE will have to eliminate the remainder of its dividend. GE cut its dividend in half late last year to save the company $4 billion per year. Given the continuing surprises, the company may need that additional $4 billion in savings.
Whatever revelations appear in GE’s earnings report, holders of GE stock should prepare for more pain. I believe the company will succeed in its restructuring and continue to compete with the likes of Honeywell (NYSE:HON), 3M (NYSE:MMM), and United Technologies (NYSE:UTX). Perhaps someday it will return to the Dow 30 index. However, until the trickle of negative surprises comes to an end, investors should avoid GE stock.
Bottom Line on GE Stock
The earnings report gives GE a chance to address the issue of why GE stock is so low. The company could surprise with revenue and earnings declines that come in lower than expected. However, Wall Street will likely be looking more closely at the news coming from other fronts.
Although most expected a dividend cut and removal from the Dow 30, the negative surprises for GE have continued. This trickle of negative news continues to hurt GE stock. The company will likely succeed in its restructuring eventually. However, with one revelation after another, GE’s core problem involves trust. Until investors can know the true scope of the company’s problems, they will not see a path to profit with GE stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
