It was not a good August for General Electric (NYSE:GE) stock. Accountant Harry Markopolos, famous for blowing the whistle on Bernie Madoff, published a 175-page report, which alleged that GE had widespread fraud, including concealing $38 billion of losses. On the news, General Electric stock plunged 11%.
But GE’s management swiftly responded to the report. For example, CEO Larry Culp bought $2 million of General Electric stock Additionally, in a press release, Culp was quoted as saying: “GE will always take any allegation of financial misconduct seriously. But this is market manipulation – pure and simple. Mr. Markopolos’s report contains false statements of fact and these claims could have been corrected if he had checked them with GE before publishing the report.”
Besides, the report did not have any “smoking guns” either. Analysts at firms like Goldman Sachs and Citigroup indicated that Markopolos’s analysis was shaky.
Yet despite all this, I think General Electric stock has some nagging issues.It’s probably best to avoid buying the shares for now.
Here’s why I feel that way:
GE’s Massive Debt Load
GE has a lopsided balance sheet. Note that the company’s debt load is a staggering $105 billion, which does not even include $75 billion of “other liabilities.” To put this in perspective, the market cap of General Electric stock is $72 billion.
It’s true that GE has been making aggressive efforts to cut its expenses and unload assets, in order to cut its debt. But those actions will create problems for the company over the long-term. After all, its asset sales will reduce the revenue it obtains from strategic categories like healthcare. And its cost cutting will make it tougher for GE to invest in innovations and new products.
The Global Economy and General Electric Stock
Even with a growing global economy, GE stock has lagged. The company has continued to lose money and post negative cash flows.
So what will happen to General Electric stock now that economic growth is starting to slow? It’s hard to see things improving for GE! GE is a global company that will likely feel increasing pressure as Europe and Asia decelerate. And the U.S. manufacturing sector is starting to slow, adding to GE’s problems.
Perhaps the biggest weak spot for General Electric stock is its Power business.The unit represents about 20% of GE’s total revenues and has been weighed down by rising competition and lower demand.
According to JPMorgan analyst Stephen Tusa: “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 shares” Tusa, who predicted the massive decline of GE stock well before it occurred, now has a $5 price target on the shares.
The Organization
Without strong leadership and strategic vision, a great company can easily fail, as shown by Nokia (NYSE:NOK) and BlackBerry (NYSE:BB). But GE has been even more unnerving. Not long ago, the company was iconic, a symbol of American business ingenuity and greatness. But now the company is just a shadow of its former self.
Because of this, the morale at GE is certainly far from good. It’s also facing many disruptions because of its asset spinoffs and cost-cutting. In such an environment, it’s tough for employees to stay focused.
True, Culp is certainly a proven leader, as shown by his successful tenure as the head of Danaher (NYSE:DHR) . But he still has many challenges ahead. In other words, it will likely take some time for GE and General Electric stock to be turned around.
Tom Taulli is the author of the 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.
