GE’s (NYSE:GE) woes never seem to cease. The company’s latest issue involves GE Power, a division that has already had a series of operational setbacks. Although I do not think this problem will prevent GE stock from eventually rebounding, it could further delay the turnaround of GE Power. Moreover, those who want to buy General Electric stock should realize that this issue will further delay the company’s long-awaited recovery.
GE Stock Fell on the Gas Turbine Issue
The latest challenge arose after one of GE’s customers discovered an issue with the conglomerate’s power plant turbines. The customer, Exelon (NYSE:EXC), found what it described as an “oxidation issue” with the turbine’s fan blades at two Exelon plants in Texas. Metal alloy on the turbines were reportedly weakened, shortening the lives of the turbines. Both power plants have been shut down while crews work to fix this problem.
Exelon had only installed the turbines just over one year ago. The first of the turbines had been installed at the plants of other companies in 2016. About 30 of the turbines are currently in use, and GE hoped that 60 of them would be utilized by 2020.
Russell Stokes, CEO of GE’s Power division, describes the issue as a “teething” problem and added that new equipment normally has such setbacks. Still, the problem with the turbines will delay the division’s path to recovery.
GE Power Continues to Weigh on GE Stock
GE’s comeback hinges heavily on its power business. As of last fall, the unit accounted for about 30% of the company’s revenues. However, GE’s overly optimistic projections about the unit’s sales hurt the company. These inaccurate forecasts led to high levels of unsold inventory and 12,000 layoffs within the division.
I mentioned in a recent article that investors should avoid GE stock until the trickle of bad news comes to an end. Unfortunately for the company, bad news continues to be reported.
Moreover, one revelation after another has made General Electric stock a difficult name in which to invest. GE stock’s forward price-earnings ratio of 13.25 will look more appealing when the bad news stops. The 3.8% dividend yield would attract investors if it was not likely to be eliminated. Unfortunately, negative sentiment wields more influence than valuation at this time. As a result, GE stock price hovers just above its 52-week lows. As of now, General Electric stock appears poised to set more 52-week lows going forward.
GE Stock Will Eventually Recover
Despite my bearishness towards General Electric stock, I think GE stock will eventually bounce back. But the question is: When will that occur? The answer cannot be given in the form of a time or a certain GE stock price. In my view, investors need to stay away from the stock until it stops falling on bad news.
I predict that the price-earnings ratio of GE stock will reach single digits and that the company’s dividend will have been eliminated by that time. But General Electric stock could recover before it reaches either point.
Nonetheless, GE stock certainly cannot recover in the wake of this latest revelation. For this reason, investors who had hoped to jump into this name need to wait longer.
But unless GE reports a new, multi-billion dollar liability at its finance unit, I believe that the company will eventually recover. This turbine issue, while embarrassing and inconvenient, will not destroy the company. Still, those who want to buy GE stock should wait before doing so.
The Bottom Line on GE Stock
GE’s valuation appears to be appealing on the surface. However, the stock continues to fall despite its 13.25 price-earnings ratio. Moreover, the company’s elevated dividend yield could disappear if it needs to bolster its cash position. Although I would not leave General Electric stock for dead, I do not think it will recover in the near-term.
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.