There’s hope for General Electric (NYSE:GE). Asset sales, a new CEO, and the promise of improved execution have brought investors back into GE stock. General Electric stock has risen 43% so far this year, handily outpacing the stock market.
I’ve been skeptical of the gains since GE stock hit $10, and I was bearish on GE stock long before that. For all the coverage GE receives, many aspects of its business aren’t that attractive. GE Power serves declining end markets. Baker Hughes (NYSE:BHGE) is again challenging a 19-year low. Renewable energy hasn’t proven to be a winner. GE Capital is still dealing with errors made years ago.
GE Healthcare and GE Aviation are certainly attractive. But with GE’s heavily indebted balance sheet, and with its free cash flow expected to be negative this year, those two businesses simply are not attractive enough to make me upbeat on GE stock.
All that said, I do understand why some are bullish on GE stock, and, truthfully, I would love to see the bullish thesis play out. GE is an iconic American company. Many investors lost a large amount of money on GE stock in recent years; they deserve a rebound.
And there are reasons to be bullish on GE stock now. As I wrote just last month, GE management clearly is being more transparent. New CEO Larry Culp has sparked optimism. And to some extent, bad news is priced into GE stock. If Culp can turn around GE, General Electric stock is going to rise.
I still believe that’s too big an “if’,” however. In that context, a few recent developments need to be monitored closely.
GE Gets Transparent-ish
Culp clearly has made a point of giving investors and analysts news when possible, whether it’s good or bad. He told investors in March that GE would be cash flow-negative this year (excluding GE Capital) – and then reiterated that guidance last month. That’s a noted departure from what InvestorPlace columnist Will Healy wisely called a “constant drip” of bad news, including lowered guidance, surprising charges by GE Capital, and execution missteps that weren’t quickly revealed.
But as Bloomberg noted last month, old habits are tough to break. CFO Jamie Miller admitted that the company had created “confusion” by touting the growth of GE Power’s orders on its Q1 conference call in late April. That growth was questioned by JPMorgan Chase (NYSE:JPM) analyst Stephen Tusa, a prescient and longtime bear on General Electric stock.
At a conference three weeks after the call, Miller said the company was referencing a report from a third-party. But as Bloomberg pointed out, the report included joint-venture orders and some orders that were already in the company’s backlog before the quarter.
For any other company, this would be a minor slip-up. For a company that’s spent years seemingly twisting all news in its favor, it’s a concerning step.
GE Aviation Stumbles
Again, the company’s attractive businesses are Aviation and Healthcare. Those two segments can help keep GE afloat while it repairs its Power business and waits for a rebound in oil and gas and other smaller markets.
But the GE9x engine is taking criticism by one of GE’s key customers, Boeing (NYSE:BA). That manufacturer’s 777x is facing potential delays after a second issue with GE’s engine. Testing of the GE9x originally was delayed by three months due to a compressor issue. Further mechanical issues are delaying testing again, and GE is the “long pole in the tent,” as Boeing CFO Greg Smith put it.
This, too, isn’t major news. Neither Boeing nor Airbus (OTCMKTS:EADSY) is going to abandon GE Aviation over these delays. But – as with the transparency issue – GE’s history colors everything. A delay involving a key customer in a key business can’t be seen as good news.
GE’s China Problem
There’s another major issue with buying GE stock: the economy needs to cooperate. A recession would interrupt the company’s plans and offset Culp’s optimism about 2020 and beyond.
The trade war with China is a potential catalyst for a global slowdown. But even if that doesn’t play out, China seems to be a significant risk for GE. For GE Healthcare, China was “a source of growth” last year, as the company put it in its 10-K. But that growth may have come from unsavory methods: the SEC is investigating GE, along with Philips (NYSE:PHG) and Siemens (OTCMKTS:SIEGY) for bribery.
Moreover, Tusa and another analyst both have noted that China could create a new competitor for GE Power in the region. That market is too large, and GE Power too wobbly, to handle that type of blow.
On top of all that, tariffs already are increasing GE’s costs. And a prolonged trade war could undercut GE’s brand. The problem with an industrial company like General Electric is that it can do everything right and still be upended by external factors. Culp’s plans may not come to fruition if the news from China doesn’t improve.
On the Sidelines on General Electric Stock
To those who are bullish on GE stock, these concerns probably seem like nit-picking. But that’s what happens when a company loses trust.
That aside, GE’s turnaround path is not easy. It’s facing real challenges now. GE stock didn’t plunge just because of poor execution, bearish analysts, or uneven communication. Its fundamentals have been headed in the wrong direction for some time. It’s going to take some time, and some help, for that to change.
As of this writing, Vince Martin has no positions in any securities mentioned.