Momentum remains with General Electric (NYSE:GE) at the moment. Shares continue to march higher, even as the fundamentals don’t exactly scream bullish for GE stock. So what should investors do — buy into the recent strength or avoid it as the stock seems ahead of the fundamentals?
Although things are improving, there are certainly some concerns remaining for General Electric stock at this point.
General Electric remains a shell of its former self. It was once an American industrial titan, with a strong dividend and a blue-chip classification. However, with a stock price that’s undergone a 75% haircut, a bloated balance sheet, three CEO changes in the past five years and a quarterly dividend of just a penny per share, the damage has taken its toll.
Fundamental View of General Electric Stock
But GE stock is getting better.
Current CEO Larry Culp took over the helm in September 2018. Formerly with Danaher (NYSE:DHR), Culp brought a strong sense of confidence to the beleaguered GE. Now, he has two major metrics to improve — free cash flow and debt — and little by little he’s alleviating the pain in these two categories.
That starts with a call to his former company, Danaher. In February, GE announced the sale of its biopharma unit to Danaher for $21.4 billion. The latter just received approval for the deal from the European Union.
While management expected the deal would close by year-end 2019, it’s yet to happen. Assuming it does close though, GE has already said it plans to use the proceeds to pay down debt and improve its balance sheet.
At the time of the deal, GE’s balance sheet had more than $96 billion in long-term debt. As of the most recent quarter, that figure stood at $76.2 billion. That doesn’t tell the whole story though …
The Looming Bear
JPMorgan analyst Stephen Tusa has been bearish on General Electric stock for quite some time. In fact, he started waving the red flag before the rest of Wall Street even knew what was going on.
When GE stock reported its third-quarter results, shares rallied. But Tusa noted that there was a lot of “noise” in the numbers. Even though Tusa was referring to cash flow, that observation is true for the debt, too.
GE reports its consolidated balance, but also separates its industrial and financial balance sheets. Because of various obligations — insurance, annuity and pension liabilities — there are unknown and moving parts to the balance sheet that makes it hard for investors to diagnose.
In that report, Culp upped the company’s full-year industrial free cash flow outlook to a range between $0 and $2 billion. However, Bank of America analysts nitpicked this guidance. They essentially said that while it’s possible, it’s full of one-time and non-core catalysts. As for Tusa, he argued that the “underlying details show a situation that is far from low risk.”
Most recently, Tusa reiterated his “sell” rating and $5 price target on Dec. 20. He acknowledged that he was too bearish on GE’s aviation unit. But with Boeing’s (NYSE:BA) recent production halt of the 737 MAX, there are certainly long-term risks to GE’s business. Cash flow and growth can take a hit, particularly if the 737 MAX never recovers from the recent debacle.
In short, cash flows are improving but still face intermediate- and long-term risks. The balance sheet should improve too, but narrowing down GE’s obligations is no easy task.
At the end of the day, analysts expect sales to fall almost 23% in 2019 and for earnings to sink 6.2% to 61 cents per share. That leaves GE stock trading at 19.7 times earnings. While not egregious, it’s certainly not cheap for a stock with cash flow issues and a worrisome (but improving) balance sheet.
That’s particularly true in light of analysts’ 2020 estimates. GE will report its fourth-quarter results later this month, and it’s clear that investors are looking forward to putting the worst behind them. That’s as the GE stock price hovers near its highest mark since October 2018.
For the coming fiscal year, analysts expect revenue to shrink another 1.4% and for earnings to grow 9.8% to 67 cents per share. Any major hiccups to those estimates could disrupt the run in GE stock price.
What makes owning GE stock even harder? The fact that stocks like Honeywell (NYSE:HON) and United Technologies (NYSE:UTX) exist. They have stronger businesses, balance sheets and cash flow. Plus they’re stocks that continue to hit new high after new high.
Trading GE Stock Price
While not hitting new all-time highs, GE stock is at least pushing higher. It’s broken over long-term downtrend resistance (purple line), formed an uptrend support mark (blue line) and finally the cleared the $10.70 to $11 area. This former resistance level is now acting as support.
Investors will now want to see this level buoy GE on future pullbacks. Below it puts the 50-week moving average and uptrend support on the table. Below that and $8 is possible.
Fundamental investors who are skeptical on GE stock may prefer a pullback to account for the fundamental risk or avoid GE completely. Traders may prefer to stick to the trend until it breaks.