Shares of General Electric (NYSE:GE), the once beloved now oft-maligned industrial conglomerate, are up nearly 10% over the past week, arguably a jaw-dropping move for slumbering, slow-growth company with plenty of headline risk.
Still, 10% in a few days is nothing to scoff at, nor is GE stock’s year-to-date gain of 28.37%. Good news: with Tuesday’s close at $9.14, the GE stock price could, if Wall Street’s average price target of $10.75 proves accurate, offer significant upside from here. The trouble is, around the $11 area is technical resistance and very likely an area in which the Street considers troubled GE stock to be fairly valued.
In another point in favor of GE stock is that it trades at just 12.36x forward earnings, indicating it’s something of a value, albeit a controversial one, at a time when the value factor is showing inklings of a resurgence.
Right now, General Electric is not a growth story nor is it a clean balance sheet story. It’s a sort of fire sale, a “let’s find stuff to sell” to conserve and raise cash story.
Speaking Of Selling
There has been pressure on General Electric to bolster its balance sheet through asset sales. As I noted last month, there are some gems in the company’s portfolio that should be considered untouchable, notably the industrial engine and healthcare businesses.
The rub is that some of the other assets are damaged goods and/or not likely to fetch attractive price tags. I also pointed out that the latter description may apply to General Electric’s energy assets, such as the Baker Hughes energy business. However, when you need cash, you need cash and buyers know that. General Electric said on Sept. 10 it’s selling a majority stake in Baker Hughes for $3 billion.
Getting to the good news/bad news theme, GE stock rose on the news, but the company will take a $7 billion charge related to that sale. The deal is being announced as the VanEck Vectors Oil Services ETF (NYSEARCA:OIH) resides 50.12% below its 52-week high.
“The stake sale is the latest move by Chief Executive Larry Culp to raise cash and pay down GE’s more than $100 billion in debt,” reports Dow Jones. “It recently reached a deal to sell its airplane finance arm of GE Capital to Apollo Global Management, and has sold its transportation business. It is in the process of selling its biotech business to Danaher Corp for $21 billion.”
And keeping with the selling stuff theme, some analysts believe GE may have to sell stock to raise cash. That won’t occur at the market price or what investors perceive to be fair value. Secondary offerings also come at below market prices. That’s how big investors are enticed into the deal.
“We continue to believe that an equity capital raise by GE remains a significant possibility over the coming 1 to 2 years,” said Gordon Haskett analyst John Inch, a GE stock bear, said in a Tuesday note.
Skittish investors should note Culp said an equity raise is not in the plans for the company.
Bottom Line on GE Stock: There’s More Cleaning to Do
I haven’t even mentioned GE Capital, a business that was once growth driver for GE stock, but is now a burden. That unit has $60 billion and a debt-to-equity ratio of 4.4x, which is not attractive. On the basis of enterprise value, GE Capital would be unappealing to would be suitors, making a sale unlikely or unlikely to do much for GE stock over the near-term.
Second, the company’s industrial unit carries $40 billion in debt. So two businesses with $100 billion in combined liabilities and folks are cheering a $3 billion asset sale. Something’s not right there.
Remember, we’re at a point in the economic cycle where quality companies are very much in style. That adds risk for GE stock because, quite simply, this is not a quality name at the moment.
Todd Shriber does not own any of the aforementioned securities.
