General Electric (NYSE:GE) has downsized to the point where the stock is no longer cheap.
The market capitalization is $98.9 billion, on 2019 sales of $95.2 billion. The total debt, adjusted for loans between various GE units, is listed on the U.S. Securities and Exchange Commission Form 10-K as $90.9 billion.
It would be fine if this meant GE were pared down to just winning operations ready to rise. But almost 20% of revenue still comes from the GE Power unit that got the company into trouble in the first place. GE Aviation is now more than one-third of the whole, but there’s the Boeing (NYSE:BA) scandal and the coronavirus from China to consider.
If you’re looking for bargains in a down market, look elsewhere.
What Larry Did
This doesn’t mean CEO Larry Culp has done a bad job. Given the hand he was dealt, he has done a terrific job.
General Electric is a more coherent company today, with more focused leadership, than it was when he took over from John Flannery in late 2018. The former Harvard Business School professor has conducted a master class in corporate reinvention. It’s even possible that, a few years from now, GE stock might be worth buying.
JPMorgan Chase analyst Stephen Tusa, who has been right on GE for so long he’s routinely identified as a “GE Bear,” still has some issues. It turns out the 737 Max scandal isn’t the only problem faced by GE Aviation. The company beat analyst estimates on cash flow only because of its restructuring, and progress payments that can’t be sustained. GE Capital is still recycling money for GE Industrial, again making the numbers appear better than they are.
GE shares were already falling before the coronavirus hammered the market. The stock has now given up all January’s gains and opens for trade Feb. 27 down 2% on the year.
The Bullish Case
There are analysts who are bullish on General Electric, even more so than in January.
InvestorPlace’s Luke Lango says that the rebound in GE is still in its first few innings. He likes the idea of buying the stock on weakness, which means now would be a good time.
Once we get past the short-term turbulence, he feels, GE Aviation is going to grow. The coming injections of new capital from central banks mean industrial companies like GE should benefit. The company could still sell its steam power division, which is its biggest albatross. The average analyst estimate for 2022 earnings is about $1 per share. Achieving that goal tomorrow would make GE a bargain today.
Stabilizing the balance sheet and cash flow were big achievements, continues the bullish case. GE Capital may really be worth close to its $15.3 billion book value. Another $9 billion should come in as GE divests the rest of Baker Hughes (NYSE:BKR), the oil tools business bought by former CEO Jeff Immelt. Net debt could end the year as low as 2.5 times earnings before interest, taxes, depreciation and amortization (EBITDA), a measure of its pure earning power.
The Bottom Line on GE Stock
Even if everything the bulls say is true, you don’t need to rush into GE.
GE’s headcount is now down to 1951 levels. Only 70,000 of its 205,000 workers are in the U.S.
Much of General Electric’s recent rise was part of a general “melt-up” in the market. Just because it was overvalued in January doesn’t make it undervalued now.
I still root for GE stock, but when it comes to my money, the company is going to have to wait for it.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he held no shares in any of the aforementioned securities.