Federal Reserve Chairman Jerome Powell made prepared remarks on May 13 that suggested the economy is not about to bail out General Electric (NYSE:GE). If you own GE stock, I’d be very worried your investment is dead money until sometime in 2021, maybe longer.
Among the things Powell said in his latest address to the nation is that the Fed doesn’t expect a V-shape recovery.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said.
With millions of businesses and households hanging on by their fingertips, a flood of insolvencies could hamper the economy’s ability to free itself from the headlock the novel coronavirus has inflicted on the country.
Businesses Could Go Solvent
Could GE be in danger of insolvency? It currently has an Altman Z-Score of 1.41, which indicates it could go bankrupt within the next 24 months. That said, it appears to have enough liquidity to battle Covid-19.
Recently, Oppenheimer analyst Christopher Glynn said he thought GE’s “liquidity looks in good shape.” However, he also suggested that the company faces significant challenges at a time when it’s undergoing a major restructuring, making it very difficult for it to get any traction.
“Most all segments are experiencing sales/operating disruptions: At Power, GE expects ~20% gas turbine outages shifting 1H to 2H; Renewables faces supply chain challenges layering onto structural operating challenges; Healthcare moderate organic pressure (and likely mix headwinds), net of surges for some products,” Glynn stated in a note.
GE’s Biggest Bear Is Back
The last time I wrote about GE was in early April. At the time, I commented on the fact JPMorgan analyst Stephen Tusa, GE’s biggest bear over the past few years, had turned relatively positive about the stock, upgrading it to “neutral” from a “sell” rating while also upping the target price by 60% to $8 a share.
If you’re going to buy GE stock, you might want to make sure Tusa’s on board before you do. He’s been right about the company more than he’s been wrong.
Tusa’s upgrade was March 2. Just days after my April article was published, Tusa went back to being negative about the company, reaffirming his “neutral” rating, but cutting his 12-month target price by a dollar to $5, precisely where it was before his March upgrade.
What changed his tune?
Tusa believes that the company is not adequately protected against the collapse of the aviation sector. As a result, he’s cut GE’s earnings per share and free cash flow for the year, something he’d previously stated would be better than expected.
“For such a poor performing stock, GE has historically been, and remains, the most expensive value trap we’ve seen,” Tusa wrote in an April 14 note to clients.
General Electric reports Q1 2020 results on April 29. With Baker Hughes (NYSE:BKR) announcing it will book a $15 billion impairment in the first quarter against its Oilfield Services and Oilfield Equipment operating units due to uncertainty surrounding the demand for oil during the pandemic.
Between the problems of its 37% investment in Baker Hughes, the major headwinds at its aviation unit, not to mention an economy that could be wounded well into 2021, it’s not hard to see why analysts are lukewarm about its prospects.
The Bottom Line on GE Stock
There are 505 stocks in the S&P 500. It boggles my mind with all of these options, that investors would bother with GE until the three issues I mentioned above have disappeared. Until then, I can’t see GE stock getting anywhere near double digits.
Amazingly, some of my InvestorPlace colleagues seem to believe GE is anything but a “value trap” as Tusa’s labeled it.
“Given Culp’s [CEO Larry Culp] 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,” Larry Ramer stated on May 11.
Look, I don’t think GE is a terrible company, but I do believe it has a lot of issues that aren’t going to get fixed in this type of economy. We haven’t even seen all of the devastations the coronavirus will bring in the weeks and months ahead.
In a strong economy, as was the case in 2019, I would agree Culp has the chops to succeed. With a badly crippled economy, I just don’t see how he’s able to get any traction across most of its business lines.
This economy says GE is not a buy, even below $6.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.