Stand up and take a bow, Larry Culp.
General Electric (NYSE:GE) stock is having a fantastic year in the markets. GE stock is up 37% year to date, including dividends, in large part because of the moves you’ve made since becoming CEO on Oct. 1, 2018.
However, before you get too excited, it’s important to remember that General Electric stock is actually down about 5% in the nine months Culp has been the company’s chief executive. There’s a lot of work to be done before GE stock can hope to reach $20 for the first time since October 2017.
Normally, I’m big on letting your winners run and cutting your losers quickly. However, GE is a special case.
Tim Nash, a contributor to Corporate Knights, the magazine dedicated to clean capitalism, recently pointed out a figure that ought to give those lucky enough (and brave enough) to have bought GE stock at the end of 2018 a reason to think twice about hanging on to General Electric stock.
Nash reminded his readers that GE’s valuation peaked at a bit below $600 billion in 2000. Today the market cap of GE stock is 85% less than at the beginning of the 21st century.
Is it wise to press your luck with a company that’s made so many bad calls in the past 19 years?
Personally, I believe that J.P. Morgan analyst Stephen Tusa continues to be on target when it comes to evaluating the company’s strengths and weaknesses. His recent criticisms of GE’s Power business suggested that Larry Culp is more sizzle than steak.
In time, we’ll know if Tusa’s right. In the meantime, the owners of GE stock who are sitting on substantial gains in 2019 are at a crossroads. Should they let their profits ride? Or should they cash in their chips for a handsome gain?
Let the Profits Ride
InvestorPlace contributor Larry Ramer recently suggested that the turnaround of GE stock is real this time because it’s got several catalysts that are driving its share price higher. According to Ramer, there are no smoke and mirrors.
Exhibit # 1: GE snagged $55 billion of engine orders at the Paris Air Show, well ahead of the $31 billion it generated just two years earlier. According to Barron’s, taking the aviation’s reported numbers at face value and using the valuation multiples of its peers, the division is worth as much as $100 billion, significantly exceeding the current market cap of GE stock.
Exhibit # 2: The promise of new power infrastructure in both the emerging and developed markets around the world is very good news. The $4-billion contract it recently got as a part of a consortium to build a hydropower plant in Africa is an example of how the company is able to work with Chinese companies. Power Construction Corp., a Chinese construction company that specializes in large infrastructure projects, is part of the consortium.
Ramer’s made a convincing argument why the moves Larry Culp has made to focus GE are paying off. The question is whether they’ll be enough to continue to attract investors to General Electric stock.
Sell GE Stock and Don’t Look Back
They say you should never sneeze at a profit, especially one as large as GE’s. To not consider taking profits off the table would be irresponsible, given GE’s destroyed 85% of shareholder value since the turn of the century.
InvestorPlace’s Ian Bezek recently looked at the pros and cons of General Electric’s business. He had lots of good things to say about the moves Culp has made to transform and turn around GE, the best of which was obtaining $21 billion for its biopharma business, which Bezek says appears to have been “a solid price.” But ultimately, he came to the conclusion that the “new” GE just doesn’t provide the same potential gains for investors that it used to.
In other words, while it might regain positive free cash flow by 2020, its earning power won’t be nearly as robust as it once was. As recently as 2014, GE had almost $21 billion of free cash flow. After selling so many divisions to tidy up its balance sheet, it’s lost the ability to generate significant cash flow.
Analysts like Stephen Tusa see that as a big problem. I would tend to agree with them.
In my most recent article in June about GE stock, I pointed out that GE had a free cash flow margin of 24% in 2000. That’s almost three times higher than its margin is expected to be in 2021.
The cash flow-generating machine that once was GE is no longer. Don’t look a gift horse in the mouth.
Sell GE stock while you’ve still got a profit to talk about.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.