General Electric (NYSE:GE) has had a rough three months. GE stock has fallen 53% from its mid-February 2020 peak of $13.26 to just $6.26 on Friday, April 26.
Don’t expect the company’s upcoming Q1 report on April 29 to provide any relief from the bad news. The stock may not have seen its lows yet this year.
For one, its aviation business is having real problems. The Wall Street Journal reported last week that airlines around the world are paring back their orders. They have also parked much of their fleets given the huge collapse in worldwide travel.
This means that GE’s aviation engine orders, including for the 737 MAX, have very little upside at this point. In fact, there is very little visibility on when things will improve.
Analysts Downgrade GE Stock
Moreover, Marketwatch reported on Friday, April 24, that UBS analyst Markus Mittermaier said GE is piling up debt. He said, “… we believe the 2020 earnings drop is so steep that we revise our industrial net debt/Ebitda expectations from 2.6x to 7.4x.”
The analyst cut his estimate of earnings per share (EPS) in 2020 to eight cents per share and 41 cents for 2021. So, even at Friday’s price of $6.26 per share, the stock trades for 78 times EPS in 2020. For 2021, its P/E ratio is 15 times based on the analyst’s estimates. Of course, that assumes the company makes it through 2021 without any issues.
That is highly unlikely, according to one analyst, Harry Markopolos. He is a Certified Fraud Examiner who signaled to regulators that Bernie Madoff was a fraud. Last August he wrote a report implying that General Electric would likely have to file for bankruptcy. He based this on GE’s under-reporting of its dismal losses in its long-term care insurance business. He also believes there are potential losses in its pension fund obligations.
At the time, GE stock was in the mid-$8 range. Today it is in the low $6 per share range. I have gotten to know Harry Markopolos and believe he is a good Chartered Financial Analyst with solid research backing up his opinions.
By the way, not all analysts are negative on GE stock. Barron’s put out an article late last week listing a number of analysts who were cautiously optimistic on GE stock.
General Electric’s Financial Issues
A lot of analysts will be looking at the credibility of General Electric’s balance sheet for Q1 2020 when it comes out on April 29. Barron’s recently reported that GE has been piling up cash, repaying debt, and generally “bracing” for financial stresses in the coming months.
The problem, though, is that the company is predicting further free cash flow losses, of up to $500 million. This was according to a CNBC interview with GE CEO Larry Culp last month.
Last year the company generated almost $3 billion in free cash flow, before asset sales. But, the downturn in the company’s main business, aviation, cannot be good for the second quarter and possibly the third quarter. If people begin to travel again, with an uptick in orders for planes, it is possible the company can turn that division around. But at this point, I would not count on this.
Harry Markopolos says the company needs to take up to $29 billion in write-downs for both its long-term care insurance business and pension obligations. That could potentially use up a large portion of the company’s available liquidity.
On April 29, focus will be on what GE says its potential liabilities and liquidity will be in several months if the U.S. and the world enter into a severe recession. I have been consistently hesitant in my previous articles on GE stock. I continue to be cautious, at least until there is some measure of a margin of safety in the stock price.
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.
