Entering 2020, analysts and investors widely viewed this year as as “show me” year for General Electric (NYSE:GE). But all GE stock has done is show that it’s vulnerable to economic downturns, reminding market participants that there’s still a lot of work to be done to shore up the sprawling industrial conglomerate.
With the stock down 27.7% this month – a loss far more severe than that of the S&P 500 or the Industrial Select Sector SPDR (NYSEARCA:XLI) – it’s easy to see why some investors may want to take the bait with GE. It’s a low-priced stock that offers potential to rally on the market’s good days, but with the stock recently probing 28-year lows, it’s hard to get excited about GE as anything more than a short-term trade.
Like so many companies, GE is being punished by the toll the coronavirus pandemic is taking on the global economy. However, as is usually the case with market crises, companies with flimsy balance sheets and too much debt are enduring the most punishment.
As just two examples of stocks holding up well on a relative basis this month, there is Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Guess what they have in common? Fortress balance sheets and pristine credit ratings.
The opposite is true of General Electric. GE is highly levered, exposing it at a time when investors are fretting about companies’ ability to service debt and access capital. One of the best GE-related investments this year has been credit default swaps (CDS) traders use to hedge against debt defaults. Problem for equity investors is CDS are a lot like golf scores – you want them to be low. GE swaps have more than doubled year-to-date.
Grounded With Not Much Chance of Altitude
The stock subsequently rallied, but on Monday, General Electric said it’s laying off 10% of the workforce at its aviation unit, of which Boeing (NYSE:BA) and Airbus are the marquee customers. Global airlines turn to their respective governments for financial assistance as the industry has been decimated by the COVID-19 outbreak.
As for Boeing, it’s getting a bailout of its own, but the issues with the company are almost too numerous to list here. To simplify it in GE terms, Boeing’s 2020 production will be negligible at best. That’s a major blow to the GE bull thesis.
Investors are right to be apprehensive about GE stock against the backdrop of challenges for the aviation business.
“Last year, aviation plus GECAS [aircraft leasing] comprised about 73% of GE’s operating profit—by far the largest aerospace exposure within our multi-industry coverage universe,” said Gordon Haskett analyst John Inch in a recent note to clients.
The aforementioned cost-cutting initiatives could save GE up to $1 billion this year, but its hard to get amped about that when the unit that accounts for almost three-quarters of operating profit is imperiled. Nor is it easy to be enthusiastic about GE aviation when Boeing represents 70% of the unit’s backlog.
Oh yeah, aviation – in a normal year – represents a major source of GE’s free cash flow, something the company desperately needs more of.
Bottom Line on GE Stock
There’s plenty to criticize with GE, but the company will survive through 2020 rough patches because it can access $35 billion in bank lines of credit and $20 billion of cash incoming from the sale of its biopharma business to Danaher (NYSE:DHR), but those are not invitations to buy.
The company had $91 billion in liabilities at the end of last year and is inversely correlated to interest rates because lower rates increase the company’s retirement benefits, including pension and healthcare costs.
Between those factors and the crippled airline business, it’s safe to say investors can find more compelling names than GE.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.