It could be a while before GE (NYSE:GE) stock turns around. To be sure, General Electric, the company, will survive based on its ample liquidity and some recent belt-tightening moves. The stock, however, will have trouble in the near future.
For example, on March 23, GE announced that it is planning to reduce approximately 10% of its total U.S. workforce. They also put on a hiring freeze, canceled salaried merit increases, cut non-essential spending and reduced its contingent workforce.
CEO Larry Culp said he would cut half his salary, although he didn’t say how much that would save.
The bottom line is that these measures will save $500 million to $1 billion. Given that net income in the last 12 months to December was negative $4.97 billion, this will help a bit.
But actually, GE made almost $3 billion in free cash flow last year. So the cost cuts will help with the conglomerate’s likely cash flow downturn over the next several quarters.
Raising Liquidity and Debt
GE had $18 billion in cash as of the end of 2019. It expects to receive $20 billion from the completion of its BioPharma sale on March 31. Closing the sale of the unit to Danaher (NYSE:DHR) will help solidify GE’s financial position.
It also has $35 billion in committed credit lines and less than $1 billion in debt due through 2021. However, it will pay down $12 billion intercompany debt from the asset sale.
Based on these measures, the company says its financial position is sound. The problem is GE stock may not be able to recover as well.
The Problem with GE Stock
Back in August, whistleblower Harry Markopolos said that GE is one recession away from Chapter 11. That was before the present recession — and the global health crisis — started.
Not only are there problems with the company’s insurance business, but GE is heavily dependent on its aviation business. According to Gordon Haskett analyst John Inch, this accounts for 75% of GE’s profit and more than 100% of its free cash flow.
And, in case you hadn’t noticed, aviation is pretty much grounded now. Moreover, its engine business was already crippled by the Boeing (NYSE:BA) 737 MAX production issues. I pointed this out in my previous article on GE stock.
The point is that even when the economy starts to pick up, GE’s aviation business will still have underlying risks. These risks may prevent the company from fully recovering from the downturn in its business.
Therefore, GE stock will have a hard time coming back. For example, the company has withdrawn all of its previous guidance on sales and earnings for this year.
Investors will likely be in the dark as to when 737 Max planes will be brought back. Airlines already have enough issues with their schedules and underlying travel demand.
Moreover, GE’s credit quality is severely impaired. This is based on the company’s stake in Baker Hughes (NYSE:BKR), an oil services company.
What Should Investors Do With GE Stock?
Analyst Inch also noted that GE’s importance to the U.S. government as an industrial company is lower than in 2008. It received billions in assistance then. The U.S. government is likely to be less generous this time.
But GE is doing its part in fighting the coronavirus. Ford and GE just announced that they will produce 50,000 ventilators over the next 100 days. This will be at a GE plant in Michigan in cooperation with General Electric’s healthcare unit. After that, they can then build 30,000 per month as needed to treat patients afflicted with the coronavirus.
These efforts come just in time. Hospitals in New York already are using one ventilator to sustain two patients. Louisiana has a fraction of the ventilators it needs for a surge of COVID-19 patients.
But these measures probably won’t do much for GE stock, other than public relations. Look for the company to have a slow recovery from the recession. That will also likely mean GE stock will languish for a good while.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
