Talk about a blast from the past — General Electric (NYSE:GE) stock is up nearly 10% so far this year, thanks in part to a better-than-expected earnings report last week that has some believing there’s new life in the beleaguered company.
Bank of America (NYSE:BAC) analyst Andrew Obin raised his price target on GE stock by 33%, to $16 per share, and upgraded the stock from hold to buy after the conglomerate blew away expectations by posting earnings of 21 cents per share and revenue of $26.24 billion. Analysts had expected earnings of 18 cents per share and revenue of $25.57 billion.
GE bulls were also cheered by the company’s free cash flow of $2.3 billion, which was at the upper end of guidance.
The positive report gave CEO Larry Culp something to crow about for one of the few times since he took over the top post in October 2018.
“We’re proud of our progress in 2019, including decisive actions to reduce our leverage and strengthen our businesses. Our work continues but GE’s committed team, exceptional technology, and global network make me more confident than ever that we can deliver,” he said.
Should you believe in the GE turnaround story? As ESPN’s Lee Corso would say: “Not so fast, my friends.” As a stock, GE is in deep, deep water, and a one-quarter turnaround is just the first step of a long journey toward redemption.
GE Stock is Still Troubled
It hasn’t been so long since GE earnings really mattered. Since the company is one of the first in the earnings cycle to issue its report, General Electric earnings back in the day were a bellwether for the stock market and the general economy.
Man, have times changed.
GE was one of the original members of the Dow Jones Industrial Average. Founded by Thomas Edison and J.P. Morgan, GE was known for everything from light bulbs, home appliances, aviation, power and healthcare businesses. Even as recently as 20 years ago, it had a market capitalization of $600 billion, making it one of the most valuable public companies in the U.S.
But it all fell apart, thanks to a failed effort to invest in the homeland security business and disastrous bets on the oil and gas industry. The company’s deal to combine its oil and gas unit with Baker Hughes Company (NYSE: BKR) has been particularly painful.
GE also got crushed a few years later with subprime mortgages. According to Fortune:
“In 2004, with U.S. home prices rocketing, GE paid $500 million for a subprime mortgage company called WMC. In 2007, with home prices falling, GE laid off most WMC employees and sold the company, which lost $1 billion that year. This past February (2018), GE announced that the Justice Department “is likely to assert” violations of law at WMC when GE owned it, and GE reserved $1.5 billion against a possible penalty.”
That’s beyond painful. It’s crippling.
And then there’s the dividend. GE was one of the most reliable of dividend stocks before it lost 60% of its market cap from late 2016 to early 2018, even while the rest of the stock market was rising. GE halved its dividend, to 12 cents from 24 cents, in April 2018, then shaved it down to just a penny later that year.
Jeff Immelt, who succeeded longtime CEO Jack Welch just four days before 9/11, gets most of the blame for GE’s fall. Home Depot (NYSE:HD) founder Ken Langone told Fox Business that Immelt “had a big steel ball on a crane and he destroyed it as if he was tearing down an old building.”
Immelt’s abject failure as CEO even casts a pall on the legacy of his predecessor, the legendary Welch, under whose leadership GE’s value rose by 4,000% from 1981 to 2001.
Dependable No More
Although it was once a blue-chip stalwart of the stock exchange, GE’s time as a dependable stock has come and gone. It was booted from the Dow in 2018 — a huge embarrassment for a founding DJIA member — and GE stock is down 49% in the last five years, completely missing out on the bull run that pushed the Dow and the S&P 500 index to repeated new heights.
Sure, the company had a better-than-expected corner. But if you are to believe this turnaround story than you have to accept the fact that GE is making its turn while standing at the bottom of a veritable ocean of mismanagement, weak performance and an outdated business model. It has years to go before it breaks the surface, and you’re likely to drown if you go along for the ride.
There are better stocks out there than General Electric. Appreciate that there’s a temporary bump in the stock price, sell GE stock and move on to greener pastures.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.
