While General Electric (NYSE:GE) could be badly hurt by the coronavirus if the panic over the outbreak continues for a long time, I don’t expect that to happen, even though GE stock has had a tough month.
The company still has strong, positive catalysts, including the continued rebound of its Power unit, a huge backlog, and the likely continued reduction of its debt. Given all of these points and the current low valuation of GE stock, I expect the shares to climb over the long-term.
At least in the U.S., fears about and reactions to the coronavirus have been far more intense than during previous outbreaks of deadly diseases. For example, during the H1N1 epidemic that started in 2009 and the measles outbreak of the 1960s, life in the U.S. went on almost entirely as usual, without huge drops in travel, business closures, large-scale quarantines, major panics, or huge stock market declines.
When AIDS first emerged in the early 1980s, experts did not know how the disease (which at that time caused the death of everyone who contracted it within a couple of years)spread. Yet travel and commerce did not slow down tremendously then.
A variety of factors probably account for the much more intense reaction to coronavirus than past outbreaks. Among these are the 24-hour news cycle, the presence of the internet and social media, political biases among many in the media during an election year and increased legal liabilities for businesses now versus the past.
GE After the Virus
But regardless of the cause, airplane travel, of course, has slowed tremendously now. That’s already hurting GE, since its Aviation unit, which makes engines for airplanes, generates more revenue than any of its other industrial businesses.
During a Mar. 4 conference call, the company estimated that the outbreak would lower the cash flow of its Aviation business by $200 million to $300 million in Q1. It now expects the 2020 revenue of the unit’s commercial business to be unchanged versus the previous year, and it expects the overall unit’s sales to increase by a “low-single-digit” percentage this year.
In 2019, the segment’s revenue jumped 13% year-over-year. If the unit’s cash flow decline continues at a similar rate for the rest of the year, Aviation’s overall cash flow would take an $800 million to $1.2 billion hit in 2020. But I don’t expect that to happen.
In fact, I don’t expect the panic, which is unprecedented in modern U.S. history and, for healthy people below the age of 60, totally unjustified, to last more than a few more weeks.
The End of the Panic
Eventually, more people will realize that for much of the population, the death rate from coronavirus is very low. For example, in China, the overall death rate outside of the province where the virus began was 0.4%. And China is a nation with a much higher percentage of smokers than the U.S., much more air pollution than the U.S., and a much less advanced medical system than the U.S.
Moreover that 0.4% death rate is only three-tenths of a percentage point higher than the flu. As more medical doctors like Dr. Drew Pinsky speak out and say that people are getting too worried about the coronavirus, the message will eventually penetrate.
As I’ve noted in the past, John Nicholls, a Hong Kong-based pathologist has said that the spread of the virus will “start to burn itself out in May when temperatures rise.” And indeed, the virus has not spread very much in warm places. For example, as of Mar. 12, Hawaii has two known cases and Arizona has just nine cases.
Outside of the U.S., despite their proximity to China, Taiwan and Singapore, which are both quite warm, have kept the virus completely under control. Therefore, in many places in the U.S., the virus’ transmission is likely to start to greatly slow within a few weeks. By a month from now, the transmission will likely start to slow to the point where the media will have to widely report the slowdown. At that point, much of the panic over coronavirus should end.
Positive Catalysts for GE
Meanwhile, GE’s large Power unit continues to recover, proving the bears who left it for dead completely wrong. During its conference call earlier this month, the company said that it expects the unit’s revenue to rise slightly this year.
GE added that it expects Power’s 2020 free cash flow to be higher this year than in 2019. However, the unit’s free cash flow for the year is still expected to be negative.
Meanwhile, despite Aviation’s difficulties, the company still expects to generate earnings per share, excluding some items, of ten cents in Q1, and it still has an incredibly high $405 billion backlog. Moreover, it continues to believe that it can cut the debt of its industrial businesses to 2.5 times their EBITDA this year, down from 4.8 times at the end of 2018.
The Bottom Line on GE Stock
Despite its huge backlog, the growth of its Power business and its declining debt, GE is now trading for just 0.9 times its sales. While the growth of its key Aviation business has greatly decelerated this year, I expect the unit to begin to recover in Q2 as the coronavirus panic eases. Therefore, I recommend that long-term investors buy GE stock at its current levels.
As of this writing, Larry Ramer owns shares of GE stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
