Even as stock markets and very risky names like Carnival (NYSE: CCL) have rallied in the last couple of weeks amid diminishing fears about the novel coronavirus, General Electric (NYSE: GE) has sat out the rally. On April 14, GE stock was changing hands for $6.95, down slightly from the $7.30 it reached on Apr. 2.
Yet in the short-term, GE’s results are unlikely to drop sharply. And in the longer term, its top and bottom lines will, in all likelihood, rebound quickly and sharply. Here are four more specific reasons for my continued bullishness on GE stock.
In both the short-term and the long-term, I believe that Aviation, the company’s largest business, will beat most people’s expectations.
First, as of the end of 2019, the unit’s backlog was an incredible $273 billion. Even if airlines cancel a meaningful portion of their orders, the unit will be able to realize plenty of revenue by completing and delivering orders for engines that weren’t canceled. That phenomenon will limit any weakness by Aviation in the shorter term.
Over the longer term, as I wrote in previous columns, I expect airplane travel to rebound more quickly and more strongly than many may expect. That should result in stronger than expected orders for the Aviation unit’s engines in the longer term. Those higher than expected orders, in turn, should meaningfully boost GE stock.
Guidance and GE Stock
GE’s updated guidance, released on April 9, was taken by many investors to be very bearish because the company stated that its Q1 earnings per share, excluding certain items, would be “materially below its prior guidance of about” 10 cents.
Management explained that the company’s EPS has dropped “primarily due to non-cash and timing items in Aviation, Renewable Energy, and GE Capital,” adding that they now expect their closely-watched industrial free cash flow metric “to be near” its initial guidance of -$2 billion.
In other words, excluding noncash items and timing issues, GE’s industrial businesses are performing quite close to the company’s previous expectations. That fact, in turn, suggests that my previous point about Aviation doing better than many expect is on target.
Other SectorsLook Good
Of course, electricity is still flowing everywhere during the coronavirus crisis. And I would assume that, since electricity is considered essential by every government, most projects involving the construction and maintenance of power plants are still proceeding around the world. As a result, the company’s Power and Renewables units should not be significantly affected by the coronavirus crisis.
As I pointed out in a prior column, less use of electric cars has temporarily removed strong, positive catalysts for those units. But as I also noted, the positive catalyst should return over the longer term as mass closures are eased.
Finally, GE’s Healthcare unit is in a similar situation as Medtronic (NYSE: MDT), which I wrote about a couple of weeks ago. Specifically, Healthcare is being hurt by reduced demand for its products that are used in elective surgeries. But that phenomenon should be largely offset by huge demand for its products, including ventilators, that are being used to treat coronavirus patients.
Preventing a Cash Crunch
The company has obtained net proceeds of $20 billion from selling its Biopharma unit to Danaher. That deal closed in Mar. 31.
As I noted in the prior column on GE, I believe that the conglomerate’s CEO, Larry Culp, strongly hinted that the deal would prevent it from experiencing liquidity problems.
Moreover, GE subsequently made a deal that “replaces shorter-term debt with longer-term debt.” And on Mar. 23, the company announced that it would reduce Aviation’s workforce by 10%.
Cumulatively, I believe that these actions leave the company very well-positioned to avoid a liquidity crunch during the coronavirus crisis.
The Bottom Line on GE Stock
Aviation’s large backlog will prevent it from getting slammed in the short-term, and the economic recovery from the coronavirus crisis should boost the unit’s results over the longer term.
Meanwhile, the results of the company’s other main industrial units—Healthcare, Power, and Renewables—should not be meaningfully undermined by the crisis. Moreover, steps that the company has taken should prevent it from running out of cash during the crisis.
Given these points, along with the fact that GE stock has meaningfully underperformed recently, I recommend that longer-term investors buy the shares at this point.
As of this writing, Larry Ramer owned shares of GE stock and Medtronic. 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.
