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Betting on General Electric Stock in 2019 Really Paid Off

CEO Larry Culp has completed the easy part of GE's turnaround

In 2019, General Electric (NYSE:GE) stock was great again. Shares rose almost 40% against the average 29% gain in the S&P 500. CEO Larry Culp drew praise for his turnaround plan, which involves improving operations and selling only what’s necessary.

Whether or Not You Believe the Fraud Allegations, Avoid GE Stock
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On Jan. 14 the shares opened for trade at $12.16. That’s a market capitalization of $106 billion. That’s cheap when sales are $120 billion. But it’s not cheap when profits remain elusive.

Still, the veneration of Culp is on. The company’s hometown paper, The Boston Globe, proclaims that “GE’s long-awaited turnaround starts to take hold.” Barron’s says that “GE had a great 2019” — and perhaps a better one than Walgreens (NASDAQ:WBA). Don’t forget, WBA replaced GE in the Dow Jones Industrial Average in 2018.

Are Things Really That Good?

Barron’s points to earnings before interest, taxes, debt and amortization (EBITDA), in calling GE a buy. Culp wants to get the ratio of net debt to EBITDA down to 2.5 on his industrial business. Debt is down to $76.2 billion as of September.

But there’s also $57.1 billion in “other long-term liabilities,” which began with former CEO Jack Welch’s reinsurance of long-term care policies in the 1990s. There is enormous risk there, ratings agencies like Fitch have been saying. Investors don’t seem to care.

Culp has been shedding assets as best he can, including the biopharma unit of GE Health, which went to his former company, Danaher (NYSE:DHR). He has frozen the company’s pension plan, and retirees are suing over where their money went.

Stephen Tusa of Morgan Stanley has been right on GE for the last half-decade. He continues to have a “sell” rating on the stock. But UBS now has GE stock rated as a buy, thanks mainly to the healthcare business, which continues to deliver profits.

Mo’ Problems

General Electric makes its profits from big healthcare gear like MRI machines, and from jet engines for big airplanes. It loses money on other turbines, like those used in power plants. Previous CEO Jeff Immelt bet big on a contradictory plan of efficiency and expanded power supply, and GE has paid big for it.

But will the jet engine business continue to fly, given growing problems at FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS), both big buyers of planes, and an industrial slowdown in Europe, as well as Boeing’s (NYSE:BA) continuing halt on 737-MAX production. GE made the engines on the 737-800 that crashed in Tehran recently.

Growing Caution

That may be why InvestorPlace writers have grown cautious on GE stock.

Tom Taulli writes that the easy part of Culp’s job is done, and the hard part has yet to start.

Bret Kenwell says the technicals on the stock are bullish, but the fundamentals are not.

GE Appliances was a big exhibitor at this year’s Consumer Electronics Show, with a new Kitchen Hub at its center. Critics call it a 27-inch, Netflix (NASDAQ:NFLX) equipped microwave. As in, who needs it?

The Bottom Line on GE Stock

I have been negative on GE stock for years now. Knowing the costs of nursing care, I genuinely feel that long-term care is a ticking time bomb that can blow up the whole company.

That doesn’t mean I “hate” GE, any more than Tusa does. My own analysis was as burned by Immelt’s failures as anyone’s. No one likes to be correct when predicting bad news.

But it’s clear now that Immelt, and Welch, made fundamental mistakes even the best CEO may be unable to correct. I thought Culp would do well when he was hired, and he has.

That doesn’t mean I want to share his risks in 2020.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/betting-on-general-electric-stock-in-2019-really-paid-off/.

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