General Electric (NYSE:GE) is being riddled by a series of unfortunate events. And the larger problem for CEO Larry Culp is that the problems are touching every GE business unit. Prior to its stimulus-related boost on March 26, GE stock was down nearly 50% in 2020.
For the past two years, GE has been trying to reinvent itself into a “digital industrial” corporation. The pillars of the new GE would be: power, renewable energy, aviation and healthcare. That strategy required the company getting leaner and more efficient.
In 2019, GE made a lot of solid moves. And investors rewarded the company by boosting GE stock by nearly 45%. But it’s been a different story in 2020.
GE Is Getting Pummeled by a Perfect Storm
For GE, a key tenet of their future strategy was wind power. That seemed like a reasonable gambit when oil was priced around $50 per barrel. But then Saudi Arabia and Russia started a price war. What the ultimate resolution of that will be is anyone’s guess. However, that shock to the stock seemed like nothing compared to what came next.
The labeling of the coronavirus as a pandemic has caused states to institute varying degrees of social distancing policies. From recommendations to shelter-in-place directives, American consumers are being told not to go anywhere. So even with gas prices approaching record lows, there’s nowhere for consumers to go.
And then there’s GE Aviation’s ongoing issues with Boeing (NYSE:BA). As a key supplier to Boeing, the aviation unit’s business was being disrupted by Boeing’s inability to gain regulatory approval on their redesign of the 737 Max. But again, that problem seems like a toothache compared to the grounding of nearly every airplane in the United States. An issue which, says Culp, may result in no work for about 50% of that unit’s employees.
And to complete the trifecta, Culp stated that GE Healthcare is experiencing lower demand for equipment due to consumers cancelling or postponing elective procedures.
The Company Should Survive
As of this writing, the Coronavirus Relief Bill has passed. But it’s not clear how much – if any — stimulus GE may receive. The bill officially devotes $500 billion to propping up corporations affected by the coronavirus.
However, only $46 billion of that total will go to airlines (such as Boeing) and other firms which the government deems critical to national defense. GE falls into the latter category. However, a GE spokeswoman told the Wall Street Journal that, “We didn’t seek and don’t have plans to request funds from this provision.”
In a recent article for InvestorPlace, Bret Kenwell wrote that any prior guidance GE had given investors was likely to be inaccurate. On March 25, the company proved Kenwell was right.
Culp painted a grim picture of the effect the coronavirus will have on its business. Some of the highlights of Culp’s remarks include lowering the U.S. workforce for GE Aviation by 10%, and the aviation unit’s president and CEO David Joyce forfeiting 50% of his salary beginning April 2020. Culp is looking at other cost savings including a hiring freeze and cuts in non-essential spending. As a result, the company believes it can save $500 million to $1 billion in 2020.
On the bottom line, GE projects the coronavirus will result in a $300 million to $500 million adverse impact on its industrial free cash flow and $200 million to $300 million on its operating profit.
Prior to Culp’s guidance, analysts were projecting earnings of 55 cents per share on revenue of $90.42 billion. However, after Culp’s guidance, at least one analyst had lowered its earnings estimate to 48 cents per share based on the recent news.
What’s Next for GE Stock?
I have been skeptical of GE stock because of its lack of a clear identity. The company was once an iconic manufacturer. But in recent years, the company became synonymous with its finance arm, GE Finance. Culp has come in as a turnaround specialist, and it seems he’s taking the right steps.
The divestment of GE Healthcare’s BioPharma business to Culp’s previous company Danaher will help the company’s financial position. But the company still looks like a bunch of separate parts and not an integrated whole.
The company is stepping up its efforts to produce ventilators for treating patients infected with the coronavirus. And while that is a feel-good story, it won’t move the stock. And that’s the problem for GE. The stock has received its stimulus, but without a viable growth strategy, it’s hard to see it going any higher.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.