The General Electric Rally Is Looking Dicey

Yes, CEO Larry Culp has been spot on. But there are still some tough challenges ahead for the company.

In a recent article, CNBC examined some of the most divisive stocks in the market. And for the average investor, two top names certainly didn’t come as a surprise: Tesla (NASDAQ:TSLA) and Uber (NYSE:UBER).

GE Stock Has Plenty More Upside as It Heads Toward $15
Source: testing /

But there was one that was a bit of an eye-catcher — General Electric (NYSE:GE). Then again, the company has been in the midst of a grueling restructuring, which came after a cratering of the stock price, the sacking of several CEOs and a delisting from the venerable Dow Jones Industrial Average.

So after all this, there remains little consensus on Wall Street when it comes to General Electric. Analyst price targets range from $5-$12.

Are the Bulls Winning?

But lately, the bulls have been winning the battle. Since late August, the stock price has gone from $8 to $11 — for a gain of 37.5%.

Now the company has the benefit of a top-notch CEO, Larry Culp, who accepted the position about a year ago. He actually came out of retirement to take on the challenge and was the first outside CEO to lead the company.

His last stint as CEO was from 2000-2014 when he was at Danaher (NYSE:DHR). During this period, the company’s revenues and market capitalization jumped by five times. Culp is known for being a hands-on operator who is constantly looking for ways to improve processes. At the heart of this is a focus on lean management techniques, which grew out of Toyota (NYSE:TM).

So far, Culp has made the right moves. He has been aggressive in unloading assets, such as the biotech business and Baker Hughes (NYSE:BKR). And of course, Culp has been reducing overall costs across the organization. His expertise with lean management has certainly been key.

In the meantime, he has been assembling a top-notch senior management team. Perhaps the most important appointment was for Carolina Dybeck Happe, who will take the CFO job. She has worked at complex global organizations like A.P. Moller-Maersk and Assa Abloy. This experience will be critical for General Electric, which will need to manage accounting investigations as well as divestitures, corporate sales and deleveraging.

What Are the Challenges?

While it looks like the operations have stabilized, General Electric still faces some major problems. If anything, the restructuring is still in the early innings.

Note that the power and renewables businesses continue to be strained. The markets appear to be undergoing long-term structural changes and profitability has remained elusive. In other words, these businesses are likely to weigh on growth.

Even the healthcare business — which is solid — is not much of a driver for the top line. True, as seen with the investor presentation this week, there are some interesting products that leverage artificial intelligence. But, they will likely have little impact during the next couple years.

Oh, and the biggest wild card is the global economy. It remains fairly choppy and there is more weakness in the United States manufacturing sector. And with the upcoming presidential election, it would not be surprising if businesses become more cautious. Any sort of pullback could dampen GDP.

Bottom Line on General Electric

From a valuation perspective, General Electric is not cheap. Consider that the forward enterprise value/EBITDA ratio is at nearly 13 times. This is actually in line with United Technologies (NYSE:UTX), which is certainly in much better shape.

So all in all, it does look like Wall Street is already factoring in much of the good news. And given the considerable risks, it will probably be tough to sustain this rally.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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