General Electric’s (NYSE:GE) first-quarter results, reported on April 29, shows that the company is facing bigger challenges than I had anticipated. The conglomerate’s aviation business, despite its huge backlog, is taking a fairly big hit from the coronavirus crisis. Meanwhile, GE’s power, health care and renewable units are also encountering challenges brought about by the crisis. These issues are all weighing on GE stock.
But the problems facing aviation are likely to fade gradually over time and could very quickly disappear by early 2021, while the other units’ difficulties are likely to be eliminated by Q3. Meanwhile. the conglomerate is not going to go bankrupt.
Aviation Will Gradually Rebound
As I’ve written previously, multiple green shoots are already starting to emerge for airlines. Specifically, I noted that,
“During the last week of April, the number of airline passengers surged around 30% from the low point of 95,000 earlier in the month, reaching 154,695 on April 30, the highest total since March 29. And Jude Bricker, CEO of Sun Country Airlines said, “destinations where golf or family activities can still occur are seeing a gradual return of demand.”
I added that “a recent survey of Texans found that 28% were likely to fly by July 30.” Finally, several airlines are either planning to resume flying routes that they had suspended or have already done so. For example, United Airlines (NASDAQ:UAL) intends to “resume seven routes in June, with more to follow later in the summer assuming all goes to plan.” And over the course of May and June, American Airlines (NASDAQ:AAL) is restarting around 10 routes.
Eventually, many consumers will learn that people aren’t more likely to catch coronavirus on planes than in buildings. Further, many people will become aware of the extra steps that the airlines are taking to make planes safer.
Meanwhile, Gilead’s (NASDAQ:GILD) remdesivir and other drugs, combined with reduced spread of the virus in the hot weather and favorable mutations in the fall, could greatly reduce people’s fears of the virus going forward. Finally, a vaccine could become available as soon as early 2021.
Taken together, these points make me confident that airplane use will gradually increase over the next nine months, causing the results of GE’s aviation unit to rebound over that time.
The Other Units’ Results Will Improve More Quickly
GE CEO Larry Culp explained that the services business of the conglomerate’s power unit was hurt by travel restrictions. Obviously, travel and work restrictions are easing in many places in the U.S. and in Europe.
Renewables’ operating loss increased by $150 million, partly due to “supply chain disruptions,” CFO Carolina Dybeck Happe says. As more states and countries ease their shutdowns, those supply disruptions should ease. A number of “execution issues” also lowered the renewable unit’s orders and bottom line.
Given Culp’s history of turning around Danaher during his tenure as CEO there, as well as his success in boosting GE’s results before the crisis, I continue to have faith in his ability to fix these execution issues.
As I predicted, GE’s health care unit benefited from strong demand for products used in the diagnosis and treatment of the coronavirus. But Culp noted that the unit’s results were hurt by the suspension of elective procedures in many countries.
However, with most states allowing elective procedures to resume, that problem should ease soon. Although I was unable to determine whether other countries are removing bans on elective procedures, I think it’s a good bet that many are.
GE Remains in Good Financial Shape
As I pointed out in my previous column, GE recently received $20 billion from the sale of its biopharma unit to Danaher. Further, GE is looking to cut $2 billion of costs and has already taken cost-cutting steps, and the conglomerate expects to have access to another $20 billion of credit. Its industrial units have $33 billion of cash, and it has reduced the debt of its industrial units by about $7 billion.
Even the most bearish of bears when it comes to GE stock, JPMorgan’s Stephen Tusa, said in the wake of the company’s Q1 results that it “has adequate liquidity,” according to Barron’s.
The Bottom Line on GE Stock
GE’s industrial businesses look poised to greatly improve going forward, and the company has plenty of money to stay afloat until they turn around. Therefore, I recommend that medium-term and long-term investors buy the shares.
As of this writing, Larry Ramer owned shares of GE stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
