As markets whipsaw, should you jump into General Electric (NYSE:GE) shares? With CEO Larry Culp’s turnaround plan in motion, GE’s future looks a lot brighter than in years prior. Yet, GE stock may not be a screaming buy at today’s prices.
Prior to my last analysis on GE stock, shares had rocketed from lows around $8 per share to around $11 to $11.50 per share. At the time, I argued GE’s turnaround plan was already priced into the stock. In other words, there is minimal upside considering the many challenges within General Electric’s disparate business units.
Nevertheless, shares moved higher thanks to markets reaching new highs. Shares traded as high as $13.26 per share earlier in February. But, with the stock market maelstrom, shares have dipped back to where they were last fall. Yet, the question isn’t whether GE stock will tread water going forward. Rather, will shares tumble back to the $8 price level?
It’s possible. A key GE stock “permabear” (JP Morgan analyst Stephen Tusa) may have reversed course and upgraded the stock from the equivalent of “sell” to “hold.” Yet, for catalysts to pay off, the company needs minimal hiccups economy-wise.
In other words, coronavirus-driven headwinds need to be fewer than expected. GE Aviation needs Boeing (NYSE:BA) 737 Max risks to turn out better than expected. Simply put, upside in GE stock is going to be a challenge. Let’s dive in and see why GE shares could head lower.
GE Stock and the Coronavirus
Is potential economic damage from the coronavirus priced into GE stock? Or could shares take additional hits as the outbreak’s economic cost impacts GE’s operating units? According to InvestorPlace’s Luke Lango, the coronavirus could wind up being a non-factor. Why? Because of the V-shaped recovery pattern. According to Lango, once the virus subsides, economic activity could rebound in mid-2020.
Yet, there’s no guarantee we’ll see a V-shaped recovery post-outbreak. As noted economist Nouriel Roubini recently noted, a Chinese V-shaped recovery is unlikely. If Roubini is correct, and China’s economic growth falls well below expected rates of 5% to 6%, the spillover could cause a global recession.
How is this relevant to GE stock? As mentioned above, GE needs a stable economy in order for its turnaround to work. GE’s recently released annual report gave GE bulls in the analyst community more confidence in the company’s turnaround plan. Yet, if coronavirus leads to slowing economic growth worldwide, 2020 results could fall short of guidance (earnings of 55 cents per share). GE’s timeline for a full turnaround could also be delayed.
Credibility at Stake
Beyond the uncertainty over GE’s industrial turnaround, what’s up with GE Capital? General Electric’s financial unit has caused a lot of trouble for GE stock in recent years, primarily, the company’s risks related to long-term care insurance.
But, things could be improving. As this Seeking Alpha contributor recently wrote, insurance risks may be overstated. General Electric may wind up not having to boost its reserves to cover this large risk. In short, the company may be able to salvage some value as it unwinds the GE Capital unit. More asset sale proceeds could go a long way towards reducing GE’s debt load, improving the odds of its turnaround plan.
Another financial albatross for GE, its pension plan, could also prove to be less of a risk. Last year’s pension freeze and buyout could help minimize long-term impact.
However, will this move the needle for GE stock? Valuation-wise, GE shares are fairly priced. The stock trades for a forward price-earnings (PE) ratio of 19. Compare this to Honeywell (NYSE:HON), which sells for 18.6-times 2020 earnings. Or United Technologies (NYSE:UTX) stock, which goes for 16.3-times estimated 2020 earnings.
And this assumes GE meets its 2020 earnings guidance. If the coronavirus impacts full-year results, shares could easily retreat back as investors lose faith in Culp’s turnaround plan. If GE stock was selling for 10- to 15-times forward earnings, that would provide a sufficient discount to account for risk. But, at above $11 per share, GE stock is fairly priced, leaning on overvalued territory.
Sell General Electric at Today’s Optimistic Prices
GE stock may be just off its 52-week high. But, there’s good reason why shares could head lower in the near term. If coronavirus’s impact lingers after the outbreak subsides, the hit to global economic growth could affect GE’s industrial units.
GE Capital may not be in as much of a hole as expected. The company could work its way through its long-term pension liabilities. Yet, with shares trading on par with better-capitalized peers like Honeywell, the GE stock price doesn’t compensate for underlying risks.
In other words, sell General Electric as it trades above $11 per share. Near term, shares are more likely to hit $8 again than they are $15 or $20 per share.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
