This has been a difficult year for investors in General Electric (NYSE:GE). Year-to-date, GE stock is down about 35%.
Now many shareholders are wondering whether the group can withstand the current disruption to its portfolio of businesses.
It’s still too soon to say what the full effects of the COVID-19 outbreak on our economy as well as General Electric. However, investors may want to wait for several weeks before committing new capital to the company shares. Here’s why.
The Global Pandemic and GE Stock
The conglomerate currently reports revenue in five main segments: Power, Renewable Energy, Aviation, Healthcare, and GE Capital. Conglomerates can be defined as large diversified corporations with unrelated businesses in their portfolios.
The viral pandemic is likely to affect each GE business somewhat differently. On March 23, Chairman and CEO Henry Lawrence “Larry” Culp, Jr. shared an update regarding the steps the company would be taking during this period.
First of all, he said that he’d forgo his salary for the rest of 2020. Then, after highlighting the fact that “the aviation industry is feeling the impact of this global pandemic most acutely,” he announced that GE Aviation would have to reduce approximately 10% of its total U.S. workforce.
Culp further added, “GE Aviation is not alone in the challenges it faces. Each GE business and Corporate will need to adjust. For example, GE Healthcare is managing through reduced demand for certain equipment as elective procedures are postponed or canceled around the world.”
And on April 2. the group announced that it would furlough half of the engine manufacturing staff in the aviation segment.
Management has also reported that during the viral outbreak, GE Healthcare is working with hospitals in Europe in their efforts to manage their patients’ needs better. Similarly, in China, doctors have been using CT and ultrasound scans in their fight against the illness.
In other words, the company has openly acknowledged that these are rather difficult times full of question marks not just for GE, but also for the U.S. as well as other countries around the world.
What to Expect From Q1 Earnings
Aviation led the way, as its revenue was up 6% YoY. Orders had also increased by more than 20%. Current GE shareholders would be familiar with the fact that Aviation is dubbed the “crown jewel” of the company. It primarily builds and services aircraft engines. It makes up over a third of the total business. Therefore, any downturn in the segment would be a concern for the GE stock price.
GE’s industrial free cash flow (FCF) is a key metric for many analysts and shareholders. In Q4 the number came at $2.3 billion for 2019 and topped management’s own guidance of between $0-$2 billion.
A year ago, Culp had called the rest of 2019 a “reset year” and had urged patience during what was being portrayed as a multiyear turnaround.
Therefore, many investors were encouraged by the results in the fourth quarter. They felt that the troubled company could indeed be turning around.
What a difference several weeks have made in the outlook for the rest of the year. In his press release of March 23, Mr. Culp called GE’s financial position “sound.” However, it is still from certain how revenue and earnings will come.
For the company to turn its fortunes around, liabilities have to decrease and cash flow should increase. Now, things are not looking as rosy or clear-cut.
Therefore, if you’re not yet an investor in GE stock, you may want to wait until the earnings release in a few weeks. The shares are likely to be volatile during the reporting period.
GE Stock Price Action Urges Caution
Thomas Edison founded General Electric in 1878. And since then, it has been one of the most important companies in the U.S. Yet the new century has been paved with difficulty for management, employees, and shareholders.
A 2018 Wall Street Journal article, “GE Powered the American Century—Then It Burned Out” as well many academics studies show how both the company and its stock price declined especially in the past two decades.
For example, in August 2000, GE shares were hovering at an all-time high of about $60. By March 2009, they were around $5.70.
In 2016, GE stock saw a then decade-high of $33, but troubles for the General Electric share price began once again with 2017. Losses in the GE Capital unit and plummeting sales and profitability in General Electric’s Power business put pressure on the stock.
The market decline of 2018 pushed the shares once again to the single digits and in December 2018, the price saw a low of $6.66.
More recently, GE stock hit a 52-week high of $13.26 (Feb. 2, 2020). However, on March 18, it hit a 52-week low of $5.20. Now the price is around $7.
In the coming weeks, although long-term investors would like GE stock go and stay over $10, short-term traders will likely keep it between $6-$8.
GE is a widely held and actively traded stock. Average daily volume stands around 110 million shares. And its beta is about 1.3. So the price is likely to be about 30% more volatile than the broader market. Therefore investors should be ready for wide price swings in GE shares.
The Bottom Line on GE Stock
Even before the recent economic uncertainty hit our shores, it was proving hard for GE stock to regain investor trust for the long-term. Therefore the upcoming Q1 metrics, as well as any updated guidance for the rest of the year, are now quite important. If 2020 becomes a year when free cash flow declines significantly, then its turnaround may take a lot longer than initially envisioned.
If you already own GE stock, you might want to stay the course and hold onto your position. Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., May 15 expiry. Such a covered call position would offer you some downside protection.
Finally, those investors who would like some GE exposure but are nervous about the prospects for the year may consider buying into an exchange-traded fund (ETF) that has GE stock as a holding. Examples such ETFs would include the Industrial Select Sector SPDR Fund (NYSEARCA:XLI), the First Trust Global Wind Energy ETF (NYSEASRCA:FAN), or the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.