General Electric (NYSE:GE) shareholders have so far had a good year, nearly two months in. Year-to-date, GE stock is up about 7%. However, as the overall volatility in broader markets increases, investors are now wondering whether the bulls or the bears will have the upper hand in the coming weeks.
Despite the encouraging move up in the past months, GE stock price is still a shadow of its former self. And after years of continuous price volatility and decline, it is proving hard for management to regain investor trust for the long-term.
Although I’m bullish on the prospects for the industrial icon, there will likely be short-term profit-taking in the share price. Yet long-term investors may regard any such potential dip in GE stock price as an opportunity to buy into the company. Here’s why.
Q4 Earnings Were Robust
The company reported solid Q4 2019 quarterly results on Jan. 29, topping analyst expectations. Revenue hit $26.24 billion vs. $25.57 billion expected. EPS came at 21 cents. Analysts were expecting 18 cents.
The conglomerate currently reports revenue specific to five business segments: Power, Renewable Energy, Aviation, Healthcare, and GE Capital. In Q4, Aviation, dubbed the ‘crown jewel,’ led the way, as its revenue was up 6% YoY. Orders also increased over 20%.
GE’s industrial free cash flow (FCF) is a key metric for many analysts and shareholders. The number came at $2.3 billion for 2019 and topped management’s own guidance of between $0-$2 billion.
Investors were also quite encouraged to see the better-than-anticipated cash flow forecast for 2020. The group now expects industrial FCF to be between $2 billion and $4 billion. Analysts were estimating the number to be around $1.2 billion.
Could it be that the troubled company is turning around? As liabilities decrease and cash flow increases, it may indeed have a change to once again become a growth story.
Following the results, Bank of America analyst Andrew Obin upgraded GE to buy. And the next day, shares of GE rose more than 10% in trading.
GE is a widely held and actively traded stock. Average daily volume stands around 50 million shares. Yet despite the solid performance of GE stock in the past year, many analysts are still skeptical about the future. For example, J.P. Morgan analyst and longtime GE bear Stephen Tusa finds the stock expensive and sees it slipping toward $5.
What to Expect From General Electric in 2020
A year ago, CEO Larry Culp called 2019 a “reset year” and urged patience during what has been portrayed as a multiyear turnaround. And he has had a busy 12 months so far.
Under his leadership, General Electric has been taking several strategic steps to slim the group down to a few core units and raise cash by divesting from several businesses that no longer serve the group. Overall, Wall Street approves these strategic moves that Mr. Culp has been taking to clean up the balance sheet.
And as debt levels are pared and restructuring charges are reduced, valuation levels will likely improve further. It would be fair to say that the CEO has succeeded in buying management further time to complete the planned turnaround fully.
In 2020, many analysts believe that especially GE Aviation and Healthcare offer important long-term growth potential. Segment margins are over 20%. Could those two segments help management turn the narrative back to a growth company?
As investors analyze the individual segments, they should remember that a GE joint venture makes engines for the Boeing’s (NYSE:BA) 737 Max. And GE’s outlook for 2020 assumes that the troubled jet will return to to the skies by mid-2020.
Thus, investors are hoping that there are no negative trading updates from General Electric or Boeing in the coming weeks. Only then they may well continue to have faith that the up move in the share price will continue. Long-term believers of the company would like to see management get the manufacturing icon out of the financial hole created by years of mismanagement and ill-advised acquisitions.
Investor Takeaway on GE Stock
On Feb. 12, GE stock price hit a 52-week high of $13.26. Since then, it has given up some of the gains and the stock is hovering around $10. Still, before it followed along with the rest of the market’s coronavirus-fueled carnage this week, the shares were up more than 30% in the preceding 12 months.
Therefore, if you have paper profits, you may want to ring the cash register at these levels. Alternatively, if you are experienced in hedging in options markets, you may want to initiate a covered call position. For example, a June 19 ATM or slightly ITM covered call position would offer you some downside protection in case of a price decline.
Such a covered call would also enable you to participate in a potential up move, especially around the next earnings report. The industrial giant will release Q1 results on April 29. Analysts expect revenue of $20.83 billion and EPS of 13 cents.
If you are a buy-and-hold investor with a few years of investment horizon, then you may possibly see GE shares reach $15.
Finally, those investors who would like some GE exposure but are nervous about the prospects for the year may consider buying into an exchange-traded fund (ETF) that has GE stock as a holding. Examples such ETFs would include the Fidelity MSCI Industrials ETF (NYSEARCA:FIDU) has it as its #6 holding at 3.28% weighting, the Industrial Select Sector SPDR Fund (NYSEARCA:XLI), also #6 at 4.17%, or the Invesco Dynamic Large Cap Value ETF (NYSEARCA:PWV), #6 at 3.48%.
As of this writing, the author did not hold a position in any of the aforementioned securities.
