General Electric (NYSE:GE) stock touched a low of $6.45 toward the end of 2018. From those levels, GE stock is currently higher by 28% at $8.28.
However, during the last two to three quarters, General Electric stock has attempted a breakout above $10. Unfortunately, shares failed on several occasions. I believe, though, that the GE stock price can potentially remain rangebound, with the $10 to $11 levels serving as strong resistance zones. This coverage will discuss the fundamental factors that can keep GE depressed.
Before looking at company-specific factors, we should note that General Electric’s business is sensitive to economic cycles. A National Association for Business Economics survey indicates that three out of four economists expect a recession in the U.S. by 2021.
That’s entirely likely considering the fact that the U.S.-China trade war has already impacted growth. In addition, a potentially escalating trade war with Europe can make matters worse. Therefore, even if General Electric is working towards a possibly successful restructuring, economic headwinds will delay the company’s recovery. Macro-economic factors therefore represent the first reason to avoid General Electric stock.
Deleveraging Plans Will Be Impacted
One of the strategic objectives of General Electric in the next 24 months is to reduce leverage. The company is targeting a leverage goal of less than 2.5-times net debt to EBITDA by the end of 2020.
However, it seems that the markets are not convinced. On October 7, General Electric announced plans for freezing pension plans for 20,000 employees. Through this, GE expects to reduce pension deficits by $5 billion to $8 billion. The company also expects a $4 billion to $6 billion net debt reduction. Even with the announcement, General Electric stock has moved into the red after an initial pop-up.
I believe that the markets are looking at the following concerns:
- As of December 2018, General Electric had unfunded pension liabilities of $27.2 billion. Even considering the recent action, unfunded liabilities will remain at over $20 billion. This is at a time when economic growth is sluggish and recession concerns exist.
- GE still holds a 37% stake in Baker Hughes (NYSE:BHGE). While the company intends to sell this stake “in an orderly fashion,” I believe that a slowdown environment is unlikely to provide GE with a good exit valuation.
- General Electric expects free cash flow acceleration in GE Industrials in 2021. The company also expects to be free cash flow positive in the power and renewable segment in 2021. As I discussed above, three out of four economists expect a recession in the U.S. in 2021. Clearly, the recovery timeline is likely to be beyond 2021. This implies weaker cash flows and potentially higher-than-expected leverage.
Concerns Around GE Aviation Valuation
For General Electric, the cash cow in the recent past has been the aviation segment. However, there is limited clarity on the business segment valuation.
Stephen Tusa, an analyst at J.P. Morgan has been a long-time bear on GE stock and he believes that the aviation business is valued at around $30 billion. As Barron’s article suggests, there are Wall Street analysts who believe that the business is valued at $100 billion.
General Electric stock currently trades at a market capitalization of $75 billion. I believe that an estimate of $100 billion seems too optimistic.
One of the ways General Electric can create shareholder value is through a separate listing of GE Aviation. That seems unlikely in the foreseeable future with the company’s focus on deleveraging.
General Electric Stock Will Remain Sideways
It is worth noting that the GE stock price has remained largely sideways in the last few months. I expect that trend to sustain.
I don’t see any meaningful positive triggers. And with recession concerns, it is unlikely that the company’s business segments will deliver strong numbers.
Debt remains a concern along with significant unfunded liabilities. This along with broader economic headwinds will keep GE stock depressed.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
