General Electric (NYSE:GE) has been rather volatile so far this year, with bulls and bears both looking for big moves. After bottoming at $6.66 in December, GE stock is quickly up more than 30% in the first four months of the year, while the S&P 500 index has gained 10.8%.
Management is trying to tell an optimistic yet realistic story. But will investors be patient enough to stick with General Electric stock?
When General Electric earnings come out on April 30, investors will want to hear that business is still on track. New CEO Larry Culp has been talking a strong turnaround for GE, but he’s toeing a difficult line. On the one hand, he needs to be upbeat enough to keep investors around. Keep in mind, this stock fell from $30 to almost $6.50 in about two years. That said, Culp can’t make a bunch of promises he knows aren’t achievable. Unfortunately, GE’s future is not so simple and it will be anything but a smooth ride.
Free Cash Flow is Key for GE Stock
One of the big worries for GE stock is its cash flow situation. Simply put, what was once a free cash flow (FCF) machine is now struggling to stay cash flow positive.
After the most recent General Electric earnings report back in January and its outlook presentation in March, GE stock got a boost. That’s despite management saying 2019 would be a reset year. “This is not going to be quick by any stretch, but we understand why we underperformed in 2018,” Culp said.
So why the rally?
Culp added that he believes FCF will turn positive in fiscal 2020 and improve further in 2021. That is good news, but it won’t be a fast development considering that GE has yet to report its first-quarter results for 2019.
Long-time bear Stephen Tusa, an analyst from JPMorgan, wasn’t buying into the optimism. Tusa has nailed the decline in GE stock, pinning an underperform rating on the stock before any of his peers. However, in December he raised that rating to neutral while maintaining his $6 price target. After last month’s FCF update though, Tusa shifted back to the bear side earlier in April. He cut his rating back to underweight and slashed his price target to $5.
Investors are “underestimating the severity of the challenges and underlying risks at GE, while overestimating the value of small positives,” he reasoned, highlighted concerns along the FCF front.
In 2015, General Electric had trailing FCF of $20 billion. Its current figure? Negative $3.8 billion. Indeed, it will be a long road to recovery.
Trading General Electric Stock
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Current estimates call for first-quarter earnings of 9 cents per share, down from 16 cents a share last quarter. Consensus revenue expectations call for sales of $27.1 billion, a 5.6% year-over-year decrease. The company will have to build off those results if it wants to see any meaningful upside from current levels.
Will better-than-expected Q1 results drive GE stock higher? They could, particularly with it hanging near the bottom of its recent range.
To be clear, General Electric stock is sort of like Snap (NYSE:SNAP) to me. I’m not really bullish on the name and prefer others in the industry — like Honeywell (NYSE:HON) over GE, or Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) over Snap. That said, a stock can only go so low for so long before a bounce is in store. Under those developments, we have to respect the technicals.
When GE stock jumped to above $11 in late February, shares had almost doubled from the December lows. The stock was also over all three major moving averages and downtrend resistance. Two months later and downtrend resistance is still firmly in place, while General Electric stock is below all of its major moving averages.
Bulls need to see $9 hold as support now. This marks recent support and was resistance in January. A drop below $9 puts sub-$8.50 on the table, with a potential drop down to $7.50 being possible. On the upside, over $9.50 could set up a move back the 200-day and downtrend resistance near $10. That will be a key test.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell no position in the aforementioned securities.
