Last week, General Electric Company (NYSE:GE) hit a terrible milestone. The shares broke below $12, which was the lowest since the depths of the financial crisis in 2009. The market value on General Electric stock is now at $107 billion.
The implosion has certainly been breathtaking. Keep in mind that GE stock has dropped a grueling 48% during the past year. During this period, the economy has seen a pick-up in growth, the stock market indexes have been in the bull phase and rivals like United Technologies (NYSE:UTX) have logged double-digit gains. Yes, it seems like nothing has gone right for GE.
So what now? Is there a value opportunity here or should investors ignore GE stock? Here’s a look at the pros and cons.
GE Stock Pros
Leadership: New CEO John Flannery is a 30+ year veteran of GE. More importantly, he has a unique blend of skills for operations and deal-making. Note that he pulled off the spinoffs of Synchrony Financial (NYSE:SYF) and the appliances business.
As for his strategy for GE, it does make a lot of sense. His goal is to significantly slim down the business, with the focus on Aviation, Power and Renewables.
Flannery has already made swift moves. Consider that he is on track to dispose $20 billion in assets. And in the next few years, he plans to unload the healthcare unit and the Baker Hughes (NYSE:BHGE) holding.
Aviation: This is the crown jewel of GE. The company is the largest manufacturer of jet engines in the world.
What’s more, the long-term prospects for demand remain strong. According to the International Air Transport Association (IATA), the forecast is that the number of passengers will double in the next 20 years to 7.8 billion.
So yes, GE’s aviation business has been growing at a nice clip. Sales increased by 13% in the second quarter and orders jumped by 29%. In fact, at the recent Farnborough airshow, GE snagged a hefty $22.6 billion in wins.
Valuation and Sentiment: The valuation on GE stock is fairly reasonable, with the forward price-to-earnings ratio at about 13X. The dividend yield is also at an attractive 3.9%.
Yet perhaps the most important factor for GE stock is that the sentiment is downright horrible. So if there is any good news, it would not be surprising to see a jump in the stock — at least on a near-term basis.
GE Stock Cons
Power Business: This is the major drag on General Electric stock. In the second quarter, the revenues for the division plunged by 19% to $7.6 billion and orders dropped by 26%. There was also a steep 58% drop in profits.
Flannery is trying to find ways to reverse the situation. But so far, it looks like cost-cutting is the main approach. There are plans to slash 12,000 jobs as well as to close down various facilities.
According to Flannery: “It’s going to be a multiyear fix, I think with some volatility.”
Growth: Besides aviation, GE’s technology business offers the potential for growth. Over the years, the company has invested heavily in building its own IoT (Internet-of-Things) segment, which has been complementary to its industrial businesses.
But unfortunately, Flannery has said he plans to unload parts of the software unit. While this may seem short-sighted, he probably has little choice. GE needs to make tough decisions and there just is not enough resources to devote to new businesses.
This means it will be tough to find new avenues for growth.
Cost-Cutting: Flannery has certainly been aggressive with reducing expenses. For the first six months of the year, he cut spending by $1.1 billion — the goal is to hit $2 billion.
There has also been more discipline with capital expenditures. In Q2, there was a $300-million reduction.
While all these moves make sense, there are definitely risks. Cost-cutting can be tough to judge, as there may be some programs and initiatives that get punished too harshly. There will also likely be missed opportunities. And finally, morale will inevitably suffer, as employees wonder if they will be the next to be let go.
GE Stock Verdict
For the most part, Flannery has done a good job. Let’s face it — he inherited a company that has many tough issues.
But the power business is likely to remain a slog — and this will diminish the impact of the aviation business. This means it will be tough to gin up much growth, at least for the next few years.
So when taking the pros and cons into consideration, it’s probably best to wait on GE stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
