General Electric (NYSE:GE) seems to keep finding new ways to disappoint, and GE stock is paying the price.
Although the stock market has been in sell-off mode recently, third quarter corporate earnings have actually been quite good so far. About 60% of companies that have reported so far have beaten revenue estimates, while nearly 80% have topped profit estimates. The blended average earnings growth rate so far this quarter is 22.5%, versus expectations for 19.3% growth.
But, one company that has bucked the broadly positive earnings trend is General Electric.
The troubled industrial conglomerate just reported third quarter numbers. They missed revenue expectations. They missed earnings expectations. And, as opposed to rising more than 20%, profits actually dropped 33% year-over-year. In response to those numbers, GE stock fell to its lowest levels since the 2008-09 Recession.
Not everything was awful about GE’s third quarter report. The Aviation business continued to grow at a robust rate, while the Healthcare business remains stable and the Transportation business is improving.
But, those positives are clouded behind what has become an increasingly messy and unclear situation surrounding GE stock. The Power business continues to spiral out of control, and that is causing material financial weakness.
Meanwhile, the DOJ and SEC are both probing GE regarding accounting standards. No one knows how that will play out. Nor does anyone really know how this company will exactly restructure itself going forward, or when (if ever) the dividend will be meaningful again.
Overall, there is simply too much noise and not enough growth to make GE stock investable at current levels. As such, it is best to stay away for now.
Q3 Numbers Cloud An Already Unclear Situation
The situation at GE has been troubled and unclear for a long time.
Big bets on oil and gas have fallen through, while a lack of diversification into renewable energy has provided a double hit on operations. Yes, the Aviation business remains strong but all gains from that have been completely wiped out by a huge declines in the Power business.
Revenues are dropping. Margins are compressing. Earnings are in free-fall. Cash flows are down. The dividend keeps getting cut. Management turnover is a problem. The balance sheet isn’t pretty.
Overall, there are multiple negatives surrounding the GE narrative. And, nothing has happened over the past several months which implies that those negatives will soon become positives. Instead, Q3 numbers seem to affirm that these negatives are here to stay for the foreseeable future.
So long as these negatives hang over GE stock, it won’t head higher. Stocks need clarity to bounce. GE has anything but clarity. There are valuable underlying components to this business, and once the narrative does improve, those underlying components like Aviation and Healthcare could power a robust rally in GE.
But, that won’t happen until the other businesses stop weighing on overall results. There are no signs that this will stop happening any time soon. As such, there is no indication that GE stock will rally any time soon, either.
Valuation Isn’t Compelling, Yet
The strongest bull argument for GE is that at some point, the company’s healthy operating segments are being dramatically undervalued by the market, and that once you get rid of the unhealthy parts, GE’s earnings will dramatically improve and GE stock will roar higher.
I think this is very possible. Annualized, last quarter’s segment profits from GE Aviation, Healthcare, and Transportation alone summed to about $10.8 billion. Taking out $2 billion for interest expense and 20% for taxes, that should flow into normalized net profits of roughly $7 billion. A market-average 16 forward multiple on that implies a market-cap of over $100 billion.
GE presently has a market cap of under $90 billion.
Thus, there is reason to be bullish regarding GE in the long haul. But, a valuation bounce-back won’t happen until GE fixes the problems weighing down the business. Namely, GE needs to address its declining Power business and clean up its balance sheet.
Until the company does that, GE won’t bounce back.
Bottom Line on GE Stock
The long-term value of GE stock is supported by the healthy and profitable Aviation, Healthcare, and Transportation businesses. But, that long-term value won’t be reflected in the stock price until GE addresses the major problems weighing on its other businesses.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
