When times get tough, some analysts will tell you to run for the hills. And times have most definitely been tough for holders of General Electric (NYSE:GE) stock. The impact of the novel coronavirus has battered the share price as consumers simply aren’t in a buying mood.
Like many other large-cap stocks, GE has had to engage in a number of cost-cutting measures. Depending on your perspective, you might view this as a positive or a negative.
A slimmer, trimmer company can pave the way for enhanced profitability. Or at the very least, it can mitigate the potential for capital loss.
Apparently, one big-bank analyst doesn’t see the price dip in GE stock as a strong buying opportunity. As you’ll see, he’s used some harsh verbiage to describe his outlook on the company and its shares. On the other hand, a more cost-efficient company and a reduced share price could add up to a favorable value proposition.
Is GE Stock a ‘Value Trap’?
There’s no denying that the commercial aviation industry has taken a beating because of the spread of the coronavirus. And unfortunately for GE, commercial aviation comprises the biggest part of the company’s business.
In fact, over one-third of the $95 billion generated by GE’s sales last year came from the building and servicing of jet engines for aerospace-sector clients. So it’s particularly impactful to GE that globally, only 10,000 commercial jets are currently flying. That’s less than 40% of all commercial jets in the world.
To view it from another angle, the volume of air travelers at American airports passing through TSA checkpoints is, on a year-over-year basis, down over 95%. The GE stock price reflects this as it has fallen from more than $13 in February to $6 and change in April.
With this in mind, JPMorgan analyst Stephen Tusa gave GE stock quite a verbal lashing. He called the stock “the most expensive value trap we have ever seen.” That’s something you don’t hear every day from a big-bank analyst.
Slimming the Company Down
It’s hard to believe that Tusa and his associates haven’t seen worse value traps than GE stock. Indeed, it’s debatable that this really represents a value trap at all. Tusa lowered his price target from $7 to $5, so it’s not as if he’s predicting a 50% or 100% decline from the current share price.
Perhaps you don’t agree with Tusa that “The collapse we expect in aviation could be viewed as cyclical,” meaning that it will last for a very long time. The central question here is whether GE is taking steps to mitigate the fiscal damage.
The answer is definitely yes. For one thing, GE CEO Larry Culp has agreed to give up his salary for the remainder of this year. Plus, GE Aviation CEO David Joyce will voluntarily relinquish half of his salary.
Senior vice presidents at GE who report to Culp have agreed to give up 25% of their salaries. Moreover, vice presidents reporting to Culp have pledged to give up 10% of their salaries.
Of course, GE’s executives aren’t the only ones making sacrifices to help save the company. Last month, the company revealed that it will reduce the workforce at GE Aviation by 10%. This is unfortunate on a personal level, but it’s a retrenchment effort that value-oriented investors could view as a smart move.
All in all, between the layoffs, furloughs and the wage reductions, GE should save between $500 million and $1 billion in 2020. That’s the type of decisive action that can assure wary traders that there’s no “value trap” here.
My Takeaway on GE Stock
It’s debatable whether challenging times for the commercial aviation will be cyclical. Regardless, proactive cost-cutting measures should hopefully ensure that GE stock won’t “trap” any value-focused current or prospective buyers.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
