General Electric (NYSE:GE) stock has had one of its best months in years. After its earnings beat analysts’ average estimate, GE stock price has returned to the double digits as its stock price now hovers above $11, about 25% above its level before the earnings report. The company’s positive cash flow and falling debt levels show that GE’s turnaround remains on track.
I have long recommended that investors take a speculative bull position on GE stock. Thanks in large part to the company’s most recent earnings report, my recommendation has proven to be accurate.
Earnings Show That the Outlook of GE Stock Is Tentatively Positive
GE’s earnings blew through the average estimate. Also, as Will Ashworth pointed out, its industrial free cash flow guidance has gone from negative to positive. Its healthcare and aviation businesses lead the way, and the revenue growth of its renewables business reached 30%.
Moreover, its total debt fell from $109.85 billion at the end of Q2 to $96.41 billion at the end of Q3. With the market cap of General Electric stock now at about $100 billion, its debt levels have finally fallen below the market value of the company. The company has made considerable progress in cleaning up its highly compromised balance sheet.
The Recovery Comes At a Price
Some have paid a steep price to make this recovery possible. GE shareholders saw their annual dividend cut to just 4 cents per share of GE stock. Also, the pensions of around 20,000 employees were frozen.
Moreover, the company had to unload some valuable divisions. GE will sell its biopharma business to Culp’s former company, Danaher (NYSE:DHR), just as the revenue growth of that division reaches double-digit percentage levels. GE has also raised cash by unloading most of its Baker Hughes stake in Q3.
General Electric Stock Remains Speculative
Furthermore, investors need to remember that the recovery of GE is a multi-year process and remains tentative on many levels.
Boeing’s (NYSE:BA) 737 MAX issues caused an unexpected snag for GE stock earlier this year. GE’s engines power many of these planes, and the company had expected to obtain revenue from them after they began to be used. Moreover, GE’s Power division continues to suffer as its revenues fell 30% YoY.
JPMorgan analyst Stephen Tusa remained bearish on GE stock, as he maintained his longstanding $5 per share price target on General Electric stock.
Investors also need to remember that a recession could derail GE’s recovery. Though no signs of a recession have appeared as of yet, the almost 11-year length of the expansion increases the risk of a downturn. Further, GE Capital may still have toxic assets that could hurt the conglomerate.
Also, for all of Culp’s accolades, he has not articulated an overarching vision of the new GE that he continues to build. I think that’s important because American businesses are moving away from the conglomerate model, as shown by the decision of United Technologies (NYSE:UTX) to break itself apart. Instead, Culp’s tenure has so far focused on cleaning up the company’s balance sheet. In that area, he has logged some early successes, but much work remains.
Still, the Q3 report went a long way towards confirming a speculative bull case for GE stock. As GE continues to repair its balance sheet, I think the near-term future of GE stock continues to brighten.
The Bottom Line on GE Stock
Investors have piled into GE stock as its positive cash flows and falling debt levels have raised confidence in the company. GE’s Aviation and Healthcare divisions are leading the way, and the Renewable Energy division has registered massive revenue increases.
Still, much work remains. The GE Power division continues to struggle. Moreover, despite Aviation’s success, its results have been hurt by the 737 MAX’s issues. In the longer term, GE still has to contend with its still-massive debt load. Also, investors cannot count out the possibility of a recession or toxic GE Capital assets derailing the recovery. For this reason, I still recommend that investors only take speculative positions in GE stock.
However, as the company’s balance sheet improves and its cash flows turn positive, I think GE stock will continue to slowly but steadily rise.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.