General Electric (NYSE:GE) is in trouble. The pile-up of debt, lower sales and cratering earnings may be too much for GE stock to recover any time soon.
So far the drop in GE’s stock price seems to confirm what I am saying. Since the beginning of the year, it has fallen over 50% to $5.49 as of May 15. Monday’s 14%-plus pop was nothing about the conglomerate’s fundamentals. Barron’s noted that activist investor Nelson Peltz disclosed on May 15 that he has re-upped his long-time holding in the shares, but added “that news is probably a smaller factor in the gains.”
I previewed a further dip in the stock in my last article on GE on April 27. I argued that the company’s earnings and debt issues would weigh on the stock. Since then it had fallen 94 cents to $5.49, or 14.6%. Monday’s move regained that drop.
Still, I don’t think it’s time to consider buying GE stock yet. Here’s why.
Airline Travel Won’t Return so Fast
Airlines are not going to experience any kind of V-type recovery. It’s going to be more like a drawn-out U shape return to airline travel.
The bottom line is that people are scared of being in a closed space with others for long travel periods. That will hit GE’s aviation business, the company’s largest revenue and profit generator.
Some realistic industry participants are voicing this concern. For example, Dave Calhoun, CEO of Boeing (NYSE:BA), said it will be two to three years for airline travel to return to 2019 levels.
That adds to the pain of a growing number of cancelled MAX 737 orders, including 108 more orders nixed this past week for the jetliner, including one order, unbelievably, from GE’s leasing unit.
The problem is that General Electric relies on these orders for its jet power unit to generate cash flow. GE makes the LEAP 1B engines used on 737 MAX jets. GE reported dramatically lower results in its aviation unit. Revenue fell 13% year-over-year in Q1. But its earnings dropped 39% to just $1 billion, compared to $1.66 billion last year.
So, further order cancellations in its 737 MAX engine production are not good for GE’s long-term health. UBS analyst Markus Mittermaier, in a note to clients, said the aviation unit’s recovery is necessary for the stock, according to Marketwatch. The aviation unit is the “dominant driver” for the company’s recovery. The problem is he does not predict a recovery until 2024.
Debt Levels Will Rise Too High
Recently, Seeking Alpha author Shock Exchange wrote that GE’s best scenario is still opaque, even with the company’s asset sales. That generates a high debt ratio. He predicts a debt-to-adjusted EBITDA ratio of 6.3x. The problem, he says, is that any ratio above 5x puts GE debt into junk status.
UBS’s Mittermaier said something similar in his recent note. He wrote that GE’s net debt to industrial cash flow is going to be 7.4 times.
Moreover, he expects a best-case free cash flow of just $10.8 billion in 2022. Given that the net debt will top $59 billion, according to Shock Exchange, that means the ratio will be 5.5x.
Even though this involves free cash flow rather than EBITDA, the ratio is still important. It shows that the company is still under a heavy debt burden.
GE Stock Downside May Not be so Bad
Maybe I should not be so negative about this. For one, the UBS analyst put together several cases for the stock. In his best-case analysis of future cash flows, GE stock could hit $12 on the upside.
But his worst-case scenario shows the stock worth only $4.50 per share. After Monday’s big gain, that would be more than 28%. The problem is that right now the downside case seems to be more likely. So far, the market seems to agree.
So, the bottom line is investors should be very careful with GE stock. Analysts who have modeled the stock seem to not like the huge increase in debt.
There still seems to be room for an investment case for the stock. But right now that case just does not have a lot of powerful legs. GE stock simply may not have much upside, at least until airline travel and related businesses recover.