Until February, General Electric (NYSE:GE) stock was fairly volatile and fell more often than not. Yet the shares have stabilized in recent months. In fact, General Electric stock has been in a tight range, trading between $9 and $10.50 or so.
On July 31, when GE reports its second-quarter results, there’s a good chance General Electric stock will break out of its range.
Keep in mind that the expectations of Wall Street analysts are muted. Analysts, on average, expect GE’s Q2 revenue to come in at $28.57 billion, down from $30.1 billion in the same period a year ago. The consensus outlook calls for earnings per share of 12 cents, down from 19 cents.
But the owners of GE stock will want to get more color on the progress of the turnaround efforts of GE under its new CEO, Larry Culp. For the most part, it looks like he has a realistic plan, which is focused on asset sales and spin-offs. No doubt, GE really needs a much more focused organization.
The Issues Facing General Electric Stock
GE has lots of moving parts, and it continues to suffer from major challenges and headwinds. For example, UBS analyst Damian Karas recently downgraded GE stock to “neutral” with a price target of $11.50, down from $13.
Part of his concern is the fall in interest rates. He expects the drop of interest rates to reduce the valuation of GE stock by $1 per share. But the company is facing a host of other swirling issues, which are tough to quantify.
For example, the company has litigation exposure as well as an enormous debt load, which stands at $105 billion. Note that GE also has $75 billion of so-called “other liabilities,” such as pensions and long-term-care obligations. In other words, the company’s total liabilities are close to two times the current market cap of GE stock.
Another one of its major problems is its Power business, which accounts for about 20% of its overall revenues. Unfortunately, there is intense competition in the sector, and demand for power-plant components has continued to lag. Consider that Chinese operators are also gearing up to make an aggressive play for the business.
Stephen Tusa, who is an analyst at JPMorgan, has noted: “We believe a full accounting of the situation with a closer look at the data, even a rudimentary review, supports our view that (the Power unit of) GE is indeed losing market share…”
In 2017 and 2018, Tusa’s bear call on GE stock was accurate. What’s more, he remains dour, with his price target on General Electric stock standing at a mere $5 per share.
Interestingly enough, even GE’s Aviation business is looking dicey right now, despite its traction at the Paris Air Show recently. Boeing’s (NYSE:BA) grounding of its 737 Max could last a while. BA, a GE customer, also will likely miss the deadline on its 777X widebody plane.
If GE’s Aviation business, which accounts for about 60% of GE’s segment-level profits, slows, GE’s turnaround could be derailed. Tusa believes that such a slowdown is already occurring.
The Bottom Line on General Electric Stock
Culp seems to be making the right moves. He certainly is a proven leader, as shown by his standout performance while he was CEO of Danaher (NYSE:DHR), which was also a sprawling and complex organization.
But for GE, Culp has indicated that 2019 will be a “reset” year. This means that the owners of GE stock should expect choppiness and probably some negative surprises. For instance, Culp has already said that the 737 Max’s situation is a “new risk.”
Thus, for the meantime, GE stock may continue to languish, and investors should probably be in no rush to buy it.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.