With the sudden bull move in the markets, GE (NYSE:GE) stock has been able to regain its footing. Since March 23, the shares have gone from $6.11 to $7 for a gain of 15%.
Yet GE stock is still off about 47% from a recent high of $13.16 on Feb. 14.
At the beginning of the year, the prospects for GE were certainly encouraging. CEO Larry Culp, who took the helm on October 2018, had made lots of progress in restructuring the operations. Besides layoffs, he was able to sell a variety of assets to help provide more liquidity and reduce the debt load. The most recent deal was for the $20 billion sale of GE BioPharma to Danaher (NYSE:DHR).
Culp has also been instituting better processes across the global organization. A big part of this has been with lean methodologies, which focus on continuous improvement. Note that these techniques were originally developed by Toyota (NYSE:TM) and have been adopted by many successful companies.
Then with GE stock hitting levels not seen since the financial crisis of 2008, might there be a value opportunity here? Unfortunately, I think investors should be wary. There are some major risks that the company will need to deal with.
Macro Environment
Other than the medical business, GE’s assets are generally cyclical. In other words, there will likely be relatively steeper losses as the world plunges into a recession.
GE recently announced ominous preliminary estimates. For the first quarter, the company expects earnings per share (EPS) to be “materially below prior guidance of about $0.10.” The guidance for 2020 was also withdrawn. Yes, this has been fairly common, as seen with companies like Thermo Fisher Scientific (NYSE:TMO), Cummins (NYSE:CMI) and Caterpillar (NYSE:CAT).
Keep in mind that GE will also report Q1 results on April 29 before the market opens.
Aviation Problems
A key driver for growth and cash flows for GE is its aviation division, which manufactures jet engines. This business accounts for about 34% of GE’s sales.
But of course, aviation will quickly become a slog. Even before the impact of the novel coronavirus, there was already pressure due to the shutdown of Boeing’s (NYSE:BA) 737-Max aircraft.
Last week GE announced that it would furlough half of the workers in its US aviation manufacturing segment for a month. This actually came after a layoff of 10% on March 23.
But these cost-cutting moves may not be enough. Let’s face it, there is little clarity on when flight volume will start to recover. In the meantime, there will likely be a spike in cancellations of aircraft orders.
Financials For GE
Even the healthcare business could have issues. For example, with fewer elective surgeries, this could lower demand for medical equipment.
And here are other areas where GE could have issues:
- The Power business is likely to slump because of the depressed economic activity.
- GE’s pension obligations – which are at a over $90 billion – will be a problem. After all, with interest rates at zero, there will be challenges in funding these liabilities.
- GE still has a 37% stake in Baker Hughes (NYSE:BKR). But given the challenges in the oil industry, this asset may be less attractive in terms of monetization.
The economy may also take time in getting back on track. According to the Minneapolis Federal Reserve President Neel Kashkari: “This could be a long, hard road that we have ahead of us until we get to either an effective therapy or a vaccine. It’s hard to see a V-shaped recovery under that scenario.”
In light of all this, GE may need to do an equity raise, which will dilute the shares. Thus, it is really tough right now to find a bullish case – at least for the couple quarters or so.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
