Has the Turnaround of GE Stock Already Come and Gone?

GE stock is up 30% year-to-date, but further gains by GE may be hard to come by

GE stock

Source: Shutterstock

For the past several years, industrial conglomerate General Electric (NYSE:GE) has been on a continuous downtrend. Once one of the most important, valuable, and influential companies in the world, GE has turned into a shell of its former self thanks to mismanagement, an unbearable debt load, and a lack of company-wide innovation. This has led to GE stock turning into one of Wall Street’s biggest losers for the past several years.

GE Stock
Source: Shutterstock

But GE stock has surprisingly turned into a big winner in early 2019. Year-to-date, General Electric stock is up 30%, as the technicals, fundamentals, and sentiment of GE stock have all meaningfully improved in 2019.

 

Can this rally last? Is this the beginning of a multi-year rebound by GE stock? Or has the rally already come and gone?

That’s tough to say. GE is making all the right moves to downsize and simplify its operations. Consequently, the GE of tomorrow will have stable, healthy growth with dramatically lower leverage and significantly higher margins.

But the GE of tomorrow will also be much smaller and potentially have even less growth potential. Indeed, although GE is downsizing its operations and cutting its operational fat, CEO Larry Culp recently said that he expects its industrial-free-cash flow to be negative in 2019.

In other words, things are getting better at GE, but not that much better. As a result, after GE stock rallied over the past few months, the risk-reward profile of General Electric stock at this point in time seems neither favorable nor unfavorable. It simply seems balanced. Balanced isn’t a good enough reason to buy this stock, considering the lack of clarity of the company’s long-term outlook and the recent rally of GE stock. As a result, I think investors should wait before buying into the rally of GE.

All the Right Moves

GE’s management and GE stock are making all the right moves, and that’s why GE stock is up 30% in 2019.

Importantly, GE stock held the critical technical level of $6.66, which was the stock’s long-term level of support that dates all the way back to 2009. Not only did GE stock hold that level, but it bounced off that level in a big way. Indeed, ever since, General Electric stock is up about 40%. That’s a big move which implies that GE stock has indeed put in a bottom.

More importantly, GE’s management is doing everything right as it looks to reduce the company’s leverage and improve its operational stability and profitability. Namely, the company is shedding assets rapidly.

Among the assets that GE has sold are its transportation unit {to Wabtec (NYSE:WAB),} its biopharma business {to Danaher (NYSE:DHR),} and its Intelligent Platforms business {to Emerson (NYSE:EMR)}. Taken together,  these downsizing moves have simplified the company’s operations, improved its long-term profitability outlook, brought cash onto its balance sheet, and reduced its leverage.

In other words, things look good for GE stock. Everything that needed to happen is happening. The stock held its long-term level of support. Assets are being sold. Leverage is being reduced. Operations are being simplified.

As long as the company’s management continues to make these type of strategic and value-adding moves, it’s tough to see General Electric stock falling. But it’s equally hard to see GE stock resuming its rapid run higher.

Balanced Risk-Reward

The biggest concern about GE stock is that the company is “selling its future to try and maintain the present”, as J.P. Morgan’s Stephen Tusa pointed out in a recent note.

Tusa was referring to the company’s decision to sell the more valuable assets of its Aviation Services business. But the statement has broader applications. GE is selling a ton of assets. Many of those assets aren’t half-bad. Some are even good, like GE Healthcare.

To be sure, spinning off those businesses does provide a large amount of cash inflows, which are necessary to reduce the company’s unsustainable debt load. But, while debt reduction is an admirable goal, investors should ask: what’s next? What happens after the debt load is reduced, but many of the businesses are gone? Will General Electric stock have a bright future at that point?

No one knows the answers to those questions right now. The only tangible insight we do have is that the company’s industrial-free-cash-flow is expected to be negative this year, and that isn’t good news.

So given the enormous lack of clarity regarding what exactly will be left of GE in two to three years and the recent negative news, it’s tough to see GE stock rallying in the foreseeable future.

The Bottom Line on GE Stock

The big rebound of General Electric stock has already happened. The next leg higher will have to be driven by improvements in its fundamental growth outlook. Such improvements can only come via increased clarity with respect to what GE will look like in two to three years. Until GE’s long-term outlook is clearer, GE stock will struggle to stay on its winning trajectory.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/has-the-turnaround-of-ge-stock-already-come-and-gone/.

©2019 InvestorPlace Media, LLC