General Electric (NYSE:GE) shareholders have so far had a good year in 2019. Year-to-date, GE stock is up over 34%.
Most of the yearly gains came in the first two months of the year as investors seemed to believe that management would be able to create shareholder value in the long run.
Between March and so far in July, GE stock has been trading in a range. Therefore investors are now wondering whether the bulls or the bears will have the upper hand in Q3.
GE stock is expected to report earnings on July 31. Let us take a look at what may be in store for General Electric stock as we approach the earnings season.
GE’s Q1 Earnings and Long-Term Catalysts
On April 30, General Electric reported Q1 2019 earnings, when the group beat earnings and revenue forecasts on orders up 9%. EPS came at 14 cents vs. expected 9 cents a share.
At present, the company reports revenue in six business segments: Power, Renewable Energy, Aviation, Oil and Gas, Healthcare, and Capital.
General Electric’s Aviation, Oil & Gas, and Healthcare businesses delivered steady revenue and earnings growth.
GE Aviation business, which is the company’s largest segment by revenue, primarily builds and services aircraft engines. Earlier in June, Wall Street welcomed the news that the conglomerate signed lucrative contracts at the Paris Air Show.
The segment took significant orders for LEAP engines as well as long-term service agreements (LTSAs). Wall Street pay close importance to service agreements as over close to half of the revenues come from from after-market services.
Our readers may be interested to know that several analysts believe that the GE Aviation, which serves both commercial and military aircraft markets, may be worth about $100 billion when GE’s own market cap is only 89 billion. Therefore, long-term investors may want to pay attention to the growth trajectory of the Aviation segment.
The Oil & Gas Division, which is a cyclical business, has now returned to profitability.
In Healthcare, GE has robust exposure to the hospital and lab equipment market. Several analysts see the possibility of an IPO for Healthcare.
Within a few quarters, the company is aiming to have a much smaller GE Capital operation. The unit reduced its liabilities as it completed $1.1 billion in asset reductions in the quarter.
GE’s industrial free cash flow is a key metric for many analysts and shareholders. For the quarter, it showed a loss of $1.2 billion. Shareholders cheered General Electric in general, but especially the Power segment, burned less cash than feared.
A Year in Progress for GE Stock
In March, CEO Larry Culp called 2019 a “reset year” and urged patience during what has been portrayed as a multiyear turnaround. Following a rotation of CEOs, Culp took over from John Flannery in October. And has had a busy nine months so far.
Under new leadership, General Electric has been taking several strategic steps to slim the group down to a few core units and raise cash by divesting from several businesses that no longer serve the group.
These moves to clean up the balance sheet include the recent sales of the biopharma segment of the company’s healthcare operation to Danaher (NYSE:DHR), a smaller industrial player, for $21 billion and the merger of its transportation business with Wabtec (NYSE:WAB).
As a side note, before joining GE, Culp had successfully headed and turned around Danaher, so industry watchers were generally supportive of the sale of the biopharma operation to the group.
It has recently been reported that management would also like to sell GE Ventures, a diverse collection of over 100 startup companies.
Long-term GE investors know that its Power division has had significant problems an sharp revenue declines in recent years. GE’s core power product is the gas turbine.
Wall Street is expecting the company to break up the Power segment in the coming quarters, a move that may benefit the GE share price.
In other words through asset sales and spinoffs, GE is aiming to generate enough cash to reduce its $121 billion debt load and become more manageable.
Last year, Culp took over a company with significant debt and unfunded pension liabilities and investors are understandably still nervous.
Yet, overall, Wall Street approves the directional shift which seems to put the company on a stronger ground. And investors are reacting positively to these strategic moves that Culp has been taking.
Turnarounds in industrial giants such as General Electric take a long time and never occur in a straight path. In the next earnings report, GE investors are likely to pay attention to improvements in individual segment margins and free cash flow trends.
The GE Stock Price Now
Many long-term shareholders know that General Electric stock price is a shadow of its former self. Let us go a bit back in history.
In August 2000, GE stock hit an all-time high of $60.75. In October 2007, it was hovering around $40. By March 2009, at the heights of the great recession, General Electric’s risky balance had sheet pushed the shares down to $5.73.
In 2016, GE stock saw a decade-high of $33. But troubles for the General Electric share price began once again with 2017. Losses in the GE Capital unit and plummeting sales and profitability in General Electric’s Power business put pressure on the stock.
The market decline of 2018 pushed the shares once again to the single digits and in December of last year, the price saw a decade-low of $6.66.
As of this writing, GE stock is hovering around $10.2.
So Should Long-Term Investors Buy GE Stock?
After years of continuous price volatility and decline, it is still proving hard for GE to regain investor trust for the long term.
If you follow technical analysis, the long-term GE stock chart has been improving. In other words, bears are not in control of the stock price at this point as the worst has likely already been priced into General Electric stock.
From a longer-term technical analysis perspective, I’d expect the stock to move up another 15-20% from the current levels within a year. Shorter-term, the stock will possibly continue to trade in a range, hovering around $10.
I am also encouraged by the fact that GE stock’s current price-to-sales (P/S) ratio is over 0.73x. Companies generate revenue from the sale of goods and services. Analysts prefer a low P/S ratio, ideally below 1. However, a P/S number between 1 and 2 is more common. To put the metric into perspective, S&P 500’s average price-to-sales ratio is 2.1x.
Another way to analyze the P/S ratio is to compare companies in similar industries or segments. Our readers may be interested to know that the P/S ratio for Boeing (NYSE:BA) is 2x. For Honeywell (NYSE:HON) stock, the P/S ratio stands at 3.2x. And for 3M (NYSE:MMM) the P/S is almost 4x.
Investors who do not yet have a position may want to wait until GE’s earnings report in late July to have a better view on the developments within individual segments. Analysts will pay special attention to the sales figures in different units as well as the level of free cash flow.
Those investors who already own GE shares, may either consider taking some money off the table or hedging their positions. As for hedging strategies, covered calls or put spreads with Aug. 16 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility. Then, you may reevaluate your long position after General Electric reports earnings.
The Bottom Line on GE Stock
Over the past few months, the narrative for General Electric stock has changed for the better and GE is not making regular negative headlines any more.
I believe that many long-term investors are ready to give GE management, which has started dealing with the pressing issues, the benefit of the doubt. Therefore, I’d see any dip in GE stock price an opportunity to go long.
The author has GE covered calls (July 12 expiry).
