General Electric (NYSE:GE) has been and will continue to be a battleground stock among investors. On one side, you have investors and analysts who believe the worst is over and the turnaround is starting to take hold. On the other side, you have investors and analysts who think there is still more downside.
The most influential analyst for GE stock is Stephen Tusa, who has been bearish on the company for a long time. The following quote from Tusa shows he was not impressed with the earnings beat and improved guidance:
“The quarter was a miss operationally, with the combined Power/Renewables segments worse (despite no H-deliveries which is accretive), offset by modest upside at Healthcare and a material miss at Aviation, the key value driver.”
GE Stock Positives
GE reported earnings last week that beat Wall Street earnings expectations. Expectations were for EPS of 12 cents and results came in at 17 cents. Since GE is in the midst of a turnaround, what is just as important as quarterly results is guidance towards the future.
Given the improvements the company saw, they increased their guidance adjusted EPS to between 55 and 65 cents (up from 50 to 60 cents). In addition, they also raised adjusted industrial free cash flow guidance to -$1 billion to +$1 billion vs. prior estimates of flat to -$2 billion.
The following chart from Estimize shows the recent volatility in GE earnings in the midst of their transition. If GE can continue progressing through its turnaround plan, the last two quarters could be the low water mark in earnings.
Source: Estimize
General Electric Stock Negatives
Two negatives came out during the recent earnings report that investors need to pay attention to. The first item to pay attention to is the fact that the GE CFO is resigning. This is an important position at GE given all the potential transactions (selling units, spin-offs, etc.) that could occur as the turnaround plan continues. Given all the work that needs to be done, GE needs to find a high-quality, skilled replacement that can handle the pressure of helping with the turnaround.
The second item to pay attention to is the note GE put into their earnings report about the potential of being negatively impacted by the 737 Max grounding. GE noted that if the 737 Max stays grounded for the rest of the year, it could end up costing GE $1.4 billion in cash. Having that amount of cash pulled away in the midst of a crucial turnaround is not an ideal situation.
Bottom Line on GE Stock
The bottom line is that General Electric stock will continue to be a battleground stock because there are a number of compelling positives like increased visibility on the turnaround and increased guidance. However, there are also negatives like the search for a new CFO, which could slow the turnaround down or the 737 Max grounding, which could affect the turnaround as well.
Brad Kenagy is Long GE.
