If you’re a General Electric (NYSE:GE) investor, it has been a rough year. The iconic American conglomerate has been battling against CEO drama, debt issues and tepid sales for the past few years, but 2018 was a real kick in the teeth for GE stock investors as the company’s mounting debt problems started to look insurmountable.
With GE stock trading below $8 per share, some are wondering if it might be time to buy in order to capitalize on a turnaround.
However before jumping in with both feet, it’s important to ask yourself one question- is a turnaround really possible?
In short, the answer to that question is yes, anything is possible, but whether or not it’s likely is another story. GE’s biggest issue is liabilities.
The bulls would argue that the value of GE’s many businesses surpasses its $8 per share price tag. That doesn’t appear to be quite true when you look at GE’s liabilities.
The firm is carrying around nearly $100 billion worth of long-term debt and its insurance arm is battling with a host of long-term care plans that are becoming exponentially more expensive. So far, management has done very little to lay out a convincing roadmap to getting out from under this debt pile and if the firm carries on this way bankruptcy could be in the cards.
Of course, bankruptcy is still a long way off for a company like GE, but then, so is a turnaround. The first step to making any real progress is cutting out General Electric’s finance business.
The firm’s investment contracts, insurance liabilities and insurance annuity benefits add up to a $35.6 billion liability. That figure is only likely to get larger in the years to come as medical costs continue to rise and the population ages. This year GE management admitted that it would need an additional $15 billion just to cover future insurance claims.
GE Capital Sale
There has been some talk about GE selling off its insurance liabilities, but so far there hasn’t been any concrete evidence that a sale is in the works. The bottom line is that a sale of GE’s liabilities will be complicated and expensive and there’ aren’t many buyers out there that would be interested in that kind of purchase.
On top of its debt woes, GE is also struggling with several stagnant businesses including its flagship power business.
GE’s power arm has seen sales decline rapidly as renewable energy and increased efficiency weigh on long-term demand prospects. Once again, we’ve seen very little movement from management on a plan for the future of this business, so it’s hard to imagine it picking back up significantly any time soon.
The Bull Case for GE Stock
GE does have a few things going for itself. The firm’s healthcare and aviation arms are both solid performers and some believe that the issues the company is facing with GE Capital will eventually be resolved.
If the company is able to rid itself of GE Capital and the financial obligations that go along with its insurance arm, then its other businesses might have the potential to thrive; however that’s a very slim possibility.
Another bull argument has been the fact that GE’s Aviation and Healthcare businesses are worth more than the firm’s market cap at current levels. While that may be true, that doesn’t take into account the firm’s excessive liabilities column.
If the firm were to be broken up and sold in parts, it’s unlikely that shareholders would benefit.
The Bottom Line on GE Stock
The reality for GE stock is that it will soon be downgraded to junk-bond status if management can’t figure out a way to cut down its debt. While bankruptcy isn’t a likely outcome just yet, it’s hard to see how the firm will be able to dig itself out of this hole. The ever changing roster at the executive level is also a concern as it adds even more uncertainty to an already unstable business.
If the bull case plays out for General Electric stock, there’s certainly money to be made, but that’s a huge risk to take. Right now GE stock looks like it’s getting the hammering it deserves and with a comeback looking very unlikely, I’d stay away.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.