Heading into General Electric’s (NYSE:GE) second-quarter results, due to be reported on Wednesday before the market opens, there’s a good chance that its quarterly results will not beat expectations. But for longer-term investors, the risk-reward ratio of GE stock is extremely positive, as GE has multiple, powerful, long-term catalysts, and the company’s valuation is attractive.
A few near-term headwinds will probably prevent GE’s Q2 results from coming in above analysts’ average estimates.
Specifically, Boeing (NYSE:BA) may temporarily suspend production of its 737 Max plane and warned that its new 777X plane could be delayed because of problems that GE is having with its new GE9X engine. Those moves by Boeing may have stymied the results of GE’s Aviation unit last quarter, preventing its overall Q2 results from beating expectations.
Meanwhile, General Electric’s Renewable unit is being hurt by the looming reduction of the federal investment tax credit for wind energy projects in 2020 to 26% from 30% this year. Finally, GE’s healthcare business is suffering from “separation costs, supply chain finance transition and compensation timing.” Given all of those headwinds, GE’s overall Q2 results may even come in slightly below analysts’ average estimates. And in the short run, mediocre Q2 results could cause GE stock to retreat meaningfully.
GE Stock Has Long-Term Tailwinds
But over the longer term, General Electric stock has multiple, powerful tailwinds. Many analysts and pundits have suggested that General Electric is poised to go bankrupt or disappear. But the company is very unlikely to collapse, as its CEO, Larry Culp, has said that it’s ” ‘making a lot of progress’ on meeting its goals relative to reducing debt.”
In another article, published in January, I noted that $26 billion of GE’s debt is slated to mature this year in 2020. I estimated that the company could raise $25 billion of cash from selling assets. The company now looks poised to exceed that estimate, as it agreed to sell its biopharma unit to Danaher (NYSE:DHR) for $21.4 billion, while it’s reportedly in talks about selling its air-leasing unit for $4 billion and it has agreed to unload a small part of its stake in Baker Hughes (NYSE:BHGE) for another $4 billion.
In June, another InvestorPlace columnist, Luke Lango, pointed out that “GE’s Aviation business alone could be worth more than $70 billion.” But the market cap of GE stock now is only $91 billion, indicating that investors still have doubts about the long-term viability of GE. As those doubts continue to dissipate, the GE stock price will likely rise much further.
The company’s huge Power and Aviation businesses are showing tremendous signs of improvement and have powerful, upcoming catalysts. As I pointed out in a previous column, in Q1:
“[T]he value of (Power’s) organic orders, i.e. its orders excluding acquisitions and divestments of units, rose 14% year-over-year, while its sales fell only 4% YoY. That compares with a 19% YoY decline in orders in Q4 and a 25% YoY plunge in revenue.”
Meanwhile, in-line with my previous predictions, natural gas usage in the U.S. is actually increasing significantly, meaning GE stock bears’ prediction of continuing decline in its use has been inaccurate. And, interestingly, Los Angeles, one of the nation’s most left-wing cities in one of its most left-wing states, is looking to stop using three natural gas plants, but plans to use a new, $865 million gas plant.
So natural gas is quite alive and well in the U.S., and GE’s Power unit, which sells gas turbines and other equipment for natural gas plants, is poised to benefit from that fact. And as I’ve pointed out in the past, increased production of electric cars, data centers and marijuana will meaningfully boost electricity usage in the U.S. and other nations, significantly improving Power’s results.
Add to that the fact that Culp, who’s universally admired for his management acumen, has said that he’s working to improve the responsiveness of Power to its customers.
Aviation, meanwhile, is benefiting from non-cyclical increases in the demand for airplanes from emerging economies. Its free cash flow its expected to be flat at around $4.2 billion this year and next year, before rising in 2021. In-line with that forecast, the unit received $55 billion of new orders at June’s Paris Air Show, up from $31 billion in 2017.
The Bottom Line on General Electric Stock
General Electric stock is facing some short-term problems that will probably prevent the company’s Q2 results from beating expectations. Still, the company’s longer-term positive catalysts, along with the favorable valuation of General Electric stock, make the risk/reward ratio of GE very favorable. As a result of these upbeat catalysts, the company could also raise its longer-term guidance on Wednesday.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
