General Electric (NYSE:GE) CEO Larry Culp deserves credit for breathing new life into the GE stock price, which has surged more than 50% since January. The stock has more room to run in 2020 as Culp cleans up the mess left by his predecessors.
During the most recent quarter, GE announced or completed more than $9 billion in “Industrial delevering actions” along with changes to its U.S. pension benefits that the company estimates will reduce the firm’s Industrial net debt by between $4 billion to $6 billion.
The company received $3 billion in net cash proceeds during the latest quarter as it continues to sell its stake in its oil/gas joint venture with Baker Hughes. It also netted $1.6 billion from unloading its stake in Wabtec (NYSE:WAB). GE’s Railroad business merged with Wabtec, formerly known as Westinghouse, last year. Next up, Culp and his team expect to close the $21 billion sales of its life sciences business to Danaher (NYSE:DHR) early in 2020.
GE’s Trending in the Right Direction
Though GE’s finances are still an expensive hot mess, there are some reasons for optimism, although the company’s various businesses are not firing on all cylinders. GE stock currently trades at about $11.10 about an 6% discount to Wall Street analysts’ median 52-week target of $11.75, according to CNN. Yahoo Finance shows the consensus at $10.55. The company’s forward price-to-earnings ratio is 16.2x, under the average S&P 500 index multiple of 19x.
GE’s Power business, which for years was a cash cow, lost $144 million in the most recent quarter, an improvement from a $676 million loss a year earlier. Revenue for the business fell 14% to $3.93 billion amid a slump in orders for gas turbines. Though General Electric’s Renewable Energy division continues to hum along nicely, it is much smaller than the conventional power business.
Boon in Wind, Other Renewables
Revenue at Renewable Energy rose 13% to $4.25 billion. Orders surged 30% to $5.02 billion, fueled by strong demand for Wind Energy turbines. Though GE reported a $98 million loss in the quarter, that was due to increased spending on research and development. As climate change becomes a growing concern, GE stands to benefit from the increasing demand for offshore wind capacity, which is expected to grow at a compound annual growth rate of more than 25% through 2024, according to Global Industry Analysis.
Boeing’s grounding of the 737 Max is hurting the company’s Aviation business. Even so, the division is holding up. Revenue rose 8% to $8.1 billion, while segment profit jumped 3% $1.3 billion. However, the economic outlook for airlines can turn on a dime. According to the International Air Transport Association, the worldwide airline fleet is expected to increase by more than 1,000 aircraft to 30,000 by the end of 2020, though the outlook has worsened, and uncertainty has grown.
GE Capital, Healthcare Remains A Concern
GE Capital reported a loss of $663 million thanks to a $1 billion charge after the company took its Annual Insurance U.S. GAAP premium deficiency test. Excluding this one-time item, adjusted earnings rose to $123 million due to lower impairments and lower excess interest costs. The business, which has been “de-levering” its balance sheet, ended the quarter with $121 million of assets, including $11.8 billion in liquidity.
GE’s Healthcare business is another question mark; The biopharma business GE is selling to Danaher is the division’s fastest-growing. Otherwise, Healthcare’s performance is okay but not great. Revenue during the most recent quarter revenue rose 5% to $4.92 billion while profit jumped 13% to $974 billion. However, that increase was driven by “volume and cost productivity, partially offset by inflation, tariffs, and program investments.”
Does GE Stock Belong on Your Shopping List
Larry Culp is assembling a new team to take the venerable General Electric back and beyond to its glory days. GE stock holders may have been disappointed with the decision late last week to keep the dividend at a penny — “why bother,” many asked — but the new CEO is running a marathon, not a sprint.
When Culp came in to the job a little more than a year ago, pundits were quick to rattle off the litany of items on his to-do list, a list that was really made up of things his predecessors failed to-do, shouldn’t have done or simply, didn’t do right. They were also happy to point out what Culp stands to make if he and his team gets things right.
General Electric stock investors, willing to get on board for the long term, are beginning to grasp what their take could be if those things happen.
Jonathan Berr doesn’t own any shares of the aforementioned stocks.
