A new worry has emerged for GE (NYSE:GE), this time from prominent bears. Detractors of GE stock have expressed fears that China will build a power production company of their own. That, of course, would lock General Electric out of a needed source of business for GE Power.
While such a call might concern many, these bearish price targets reinforce the speculative nature of General Electric stock more than they signal further troubles to come.
A Possible Chinese Rival Threatens GE Stock
The negative sentiment over GE’s Power division continues. Both JPMorgan and Gordon Haskett rate General Electric stock a sell due to an emerging threat: China. They believe that China will introduce its own power company that will compete with GE, Siemens (OTCMKTS:SIEGY) and Mitsubishi Heavy Industries (OTCMKTS:MHVYF). Such a development could leave GE out of a critical market for power generation.
As a result, JPMorgan analyst Stephen Tusa has a target price on GE stock of only $5 per share. That comes in at roughly half of GE’s current price around $10.
Not all agree. Bulls argue that even if this were true, the Chinese need time to develop such a company. We’re talking until 2023 at the earliest. Still, not having the Chinese market would dramatically slow General Electric’s turnaround plans.
General Electric Stock Remains Speculative
More importantly, the China rumors make General Electric stock that much more of a speculative bet. CEO Larry Culp has implemented a credible plan to become cash flow positive again. Moreover, the “constant drip” of new issues that defined John Flannery’s time as CEO has ended under Culp.
By all appearances, he has taken the necessary steps internally to place GE stock on the road to recovery. So far, shares have responded positively. Year-to-date, the equity has risen by around 34%, more than twice the S&P 500 increase of just over 16%.
The speculative aspects of investing in General Electric come largely from outside forces. With the current economic expansion in its 11th year, the likelihood of a pullback increases, possibly derailing shares. If a Chinese power rival emerges, the door could close on a market crucial for GE’s recovery hopes.
Admittedly, that could also happen anyway if the U.S.-China trade war continues. Still, it brings further uncertainty that the company does not need right now.
However, in recent articles, I have referred to GE stock as one with a speculative buy case. I do not think the JPMorgan or Gordon Haskett reports change that. Rather, I believe they outline explicitly one of the reasons why GE remains a speculative play.
Events Could Further Test Culp’s Leadership
Still, negative sentiment could further test the leadership abilities of Larry Culp. For now, he has restored confidence in the company. However, this fix has involved internal issues, elements over which he has control. How he reacts to a Chinese market loss or a recession could ultimately define his time at General Electric.
Investors may already have an idea of how he would handle such an event. GE Aviation already deals with a similar problem. The issues with Boeing’s (NYSE:BA) 737 Max have also weighed on General Electric. After all, they build the engines that power this aircraft. Since Boeing has suspended production, that obligates Aviation to slow some of its production, at least temporarily.
Aviation has arguably become the company’s strongest division. Consequently, I see little added danger to GE stock. Still, investors need to prepare for unexpected setbacks and treat this equity as a speculative play.
The Bottom Line on General Electric
The negative calls by JPMorgan and Gordon Haskett outline more specifically why GE stock remains risky. Yes, GE Power could face a new Chinese peer on top of competition from Siemens and Mitsubishi. However, delays at GE Aviation brought about by the 737 MAX issues should remind investors that unexpected problems can emerge.
Moreover, investors who have closely followed General Electric over the last few years already know how speculative shares have become. More analyst reports outlining some of the known negatives merely remind investors of the uncertainty.
Owners of GE stock who don’t want exposure to such risks should take this information as a warning to sell. However, for those who have knowingly speculated on the embattled company, these reports change nothing.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
