My editor asked me to write about General Electric (NYSE:GE) stock recently
Although I’ve not been a fan of its stock, I agreed to keep an open mind, since turnaround CEO Larry Culp has been working some magic on the industrial conglomerate.
But what, exactly, should I write about GE stock?
And then it struck me.
At the close of trading on May 9, GE stock stood at $10.04. The shares of Ford (NYSE:F), another iconic company down on its luck, finished the same day at $10.20, a mere 16 cents higher. Although General Electric’s market cap is more than double Ford’s, since 100 shares of either stock cost $1,000, it makes sense to consider Ford stock if you’re already thinking about GE stock.
So, which is the better buy, Ford stock or GE stock? Here are my thoughts on the issue.
Free Cash Flow
One of the biggest surprises of GE’s first-quarter earnings report was free cash flow.
JPMorgan analyst Stephen Tusa, who bravely went negative on GE stock in May 2016, long before anyone else, was calling for FCF of -$3 billion. It delivered FCF of -$1.8 billion. GE stock gained almost 5% on April 30 on the news.
“Management’s explanation of the beat versus their commentary as recently as mid-March that FCF would be down substantially’ y/y is advances from orders in Aviation/Power, a plausible explanation, but also evidence of how lumpy FCF can be, why profits (booked on delivery) don’t necessarily line up with FCF over time, and why there is the ability for the company to pull forward cash, as orders are easier to time than revenues,” Tusa stated in a note to clients.
Tusa maintained his “Underweight” rating and $5 price target on GE stock.
Over at Ford, Q1 free cash flow came in at $1.9 billion, 10% higher than in the same quarter a year earlier. Ford’s FCF was 4.7% of its total revenue, while GE’s FCF was -6.6% of its sales.
Given the fact that GE continues to generate negative free cash flow while Ford’s FCF in the trailing 12 months was $7.4 billion, I don’t think there’s any question that F stock has the upper hand in that area.
CEO Compensation
When comparing companies, I’ll often look at what each CEO is getting paid, in order to determine which group of shareholders is getting a better deal. It’s not a perfect metric because every business’s situation is different, making it a bit of an apples-to-oranges comparison. But I do it nonetheless because nothing infuriates me more than excessive executive compensation.
In 2018, Ford CEO Jim Hackett was paid $17.8 million in total compensation, 71% of which came in the form of Ford stock. In 2018, Larry Culp earned $15.4 million at GE with 89% of his total compensation coming from awards of GE stock. Culp became CEO on October 1, 2018. If you annualize his total compensation, he would have earned $20.1 million, with 68% of that coming in the form of GE stock.
What stands out for me is Culp’s annual cash compensation of $2.5 million,. That’s 44% higher than what former CEO John Flannery earned in 2017, and 39% higher than Hackett’s cash compensation of $1.8 million.
I understand that Culp was brought in to turn around GE’s business and therefore is going to get a premium to do so. But cash compensation that’s almost 40% higher than Flannery’s? Culp has yet to prove that he’s worth that much to the owners of GE stock.
In this area, I believe Ford stock is once again superior to GE stock .
The Bottom Line on GE Stock vs. Ford Stock
As I stated at the beginning of the column, I’ve never been a fan of GE. Here’s how I finished my April 9 article about the company.
“As I always like to say, you’ve always got options when it comes to buying stocks. You don’t have to buy GE stock at any price,” I wrote.
“Think of Warren Buffett’s punchcard analogy where you can only buy 20 stocks for your entire life. Would you buy General Electric?”
The answer ten times out of ten should be a big, fat “no.”
I’ve only used two metrics to compare GE stock with Ford. That’s not an exhaustive look by any means. However, I believe no matter how many ways you look at the two stocks, Ford stock will be the better buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
