Keeping calm is a challenge during sharp drawdowns. General Electric (NYSE:GE) stock has tested the resolve of even the staunchest shareholders since mid-February. This is despite CEO Larry Culp’s best efforts to reassure investors.
The coronavirus from China is clearly taking a toll on the economy. Nonetheless, Culp has kept his 2020 annual fiscal outlook for General Electric intact. But does it make sense to hold onto GE stock and trust Culp’s judgment?
Staying the Course
Culp is a smart man, but it’s also his role to promote the company and reassure the investing community. So, it’s perfectly reasonable to doubt the CEO’s narrative. Besides, it’s awfully hard to stomach a share-price decline like we’ve seen in General Electric lately. It really didn’t take very long for the stock price to plummet from $13 to $9 and change.
It’s probably easier to have faith in the current CEO’s vision than that of the company’s previous CEO. In case you don’t recall, Culp’s predecessor practically ran the venerable company into the ground. (That’s an exaggeration, but only slightly.)
So, there may be good reason to have faith in Larry Culp. Still, informed investors must weigh the facts and arrive at their own decisions.
Speaking of facts, the 2020 GE Investor Outlook investor presentation cites ongoing issues, including “Capital earnings lower” and “Non-operational cash headwinds diminish, but remain.” This isn’t particularly encouraging to thoughtful investors.
Yet, Culp and General Electric are staying the course and continuing to stand by their fiscal full-year targets. Specifically, the company is predicting full-year adjusted earnings per share of 50 cents to 60 cents, compared to 65 cents in 2019. The company also forecasts $2 billion to $4 billion in free cash flow from industrial operations, compared to $2.3 billion generated in 2019.
Here’s the Catch
That sounds reasonable enough until you realize that there’s something missing.
Beyond the first quarter, the financial impact of the coronavirus isn’t factored into the company’s full-year forecast. This not-so-small detail is troubling, or at least it ought to be for concerned shareholders.
Larry Culp himself admitted in a conference call that General Electric has “large” operations in China. He also conceded, “what we don’t know outweighs what we do know at this point in time.” Moreover, in a FactSet transcript Culp said, “It’s a volatile fluid situation, unpredictable in many respects.”
The last thing that most stockholders want to hear are the words “volatile” and “unpredictable.” Heck, they probably don’t want to hear “fluid” and “what we don’t know,” either.
Honesty is supposed to be the best policy, but that might be too much honesty from a CEO during a stock-price drawdown.
In the same FactSet transcript, Culp revisited a couple of those naughty words when he declared, “We’re clearly in a fluid volatile point in time.” However, he seemingly tried to assuage investors with “But as is in prior periods, this too shall pass, in our view.”
Now is not the time to get all philosophical, Mr. Culp. GE stockholders want a plan of action. To avoid bringing back the memory of Jeff Immelt, Larry Culp should deliver a specific, compelling, actionable plan. The sooner he does this, the better.
The Takeaway on GE Stock
It might be said that General Electric has opened a new chapter in its history with Larry Culp in charge. The CEO needs more than a “this too shall pass” attitude to reassure the market. Hopefully he’ll deliver something real and compelling, sooner rather than later.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
