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5 Reasons General Electric Stock Is a Value Trap

General Electric (NYSE: GE) stock is up 38% year-to-date in 2019, giving some investors reason for optimism that its problems are finally over. However, even with General Electric stock down 64% overall in the past three years, buying on the dip is far from a guaranteed money maker.

The speculative bull case for GE stock

Source: Shutterstock

Even if all of GE’s problems are finally on the table and solutions to them are being implemented, GE has a long way to go to get its business on track. Trading under $11, General Electric stock may look cheap to some investors. However, General Electric stock may still be a value trap. Here are five reasons  why $11 is not necessarily a bargain for GE stock.

1. GE Stock Doesn’t Have a Low Earnings Multiple

General Electric stock plummeted in recent years, driven partly by s large drop in the company’s earnings. Prior to the large decline of GE’s profits in recent quarters, GE stock  historically traded at a PE ratio in the mid-teens. Today, GE’s forward PE is about 15. Not only is that in-line with its long-term range, but it is also roughly in-line with the average PE ratio for the industrial sector as a whole., which is 16.

In fact, given all of GE’s problems, a 15 PE is actually pretty generous. GE stock trades at a steep discount to its previous price, but its valuation hasn’t changed much, despite its struggles.

2. GE’s First Quarter Wasn’t as Good as It Seemed

GE stock rallied hard after the company’s first-quarter results exceeded expectations. Investors were hopeful the results indicated that the company had finally turned the corner. However, analysts were quick to point out that the Q1 numbers may have looked better on the surface than they actually were.

GE Capital turned a surprise $135 million profit in the quarter. GE management noted “tax law changes” and “lower impairments” as among the reasons for the higher than expected bottom line. These are not the type of core business improvements that investors should be excited about. In addition, GE Industrial’s free cash flow also exceeded expectations. GE cited the “timing of certain items” as the cause, which is not particularly inspiring for the owners of GE stock.

3. 737 Max Creates Even More Uncertainty

As if GE didn’t have enough of its own problems, the company recently said that it has now inherited another company’s problems. GE delivered 424 engines to Boeing (NYSE: BA) in Q1 for use in BA’s 737 Max fleet. Unfortunately, the 737 Max fleet is currently grounded while Boeing scrambles to update its software following two deadly 737 Max crashes. GE’s management said it is working closely with Boeing on the issue, but the situation creates “a new risk” to GE’s near-term outlook. GE Capital has about $1.5 billion in aviation-leasing assets tied to the 737 Max.

4. Expectations May Still Be Too High

GE stock has bounced off its lows so far in 2019. But that relief rally may simply be a sign that investors’ expectations are creeping back up into unrealistic territory. GE is guiding for negative free cash flow from its industrial segment in 2019. While long-term investors are willing to wait a year or two for GE’s industrial free cash flow to recover, Gordon Haskett analyst John Inch says the recovery may not be coming.

“Considering GE’s divestitures of high cash generating businesses coupled with Power’s substantial long-term challenges, this aspirational target screens as both dubious and lacking basic intuition,” Inch recently wrote.

Given the current state of GE’s business, Haskett estimates GE would need to double its EPS from current levels just to get back to $1 in overall free cash flow per share. Haskett said it’s fairly unrealistic to suggest a company that is aggressively selling off assets to shore up its balance sheet will somehow also be able to double its earnings power.

5. There Are Better Choices for Investors Than General Electric Stock

The final reason why GE is not a good value stock is the most practical one for any investor. GE is an industrial stock with earnings struggles, accounting issues, credit concerns and a 0.3% dividend yield. Almost any other member of GE’s industrial peer group is a better, safer bet at this point.

Caterpillar (NYSE: CAT) is trading at a 12.4 earnings multiple, reported 18.6% EPS growth last quarter and has a 3.1% dividend yield. Emerson Electric (NYSE: EMR) grew its revenue by 8.6% last quarter and has a 2.9% yield.

Emerson and Caterpillar are just two examples of safer industrial investments than GE. There’s simply no reason investors need to take a gamble on a risky name like General Electric stock, especially when there are so many better choices out there.

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

Article printed from InvestorPlace Media,

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