This was supposed to be the year that Larry Culp and his team continued driving the General Electric (NYSE:GE) redemption story. Then along came the novel coronavirus, bringing with it immense pain for GE stock.
To be fair, the pandemic is making for a brutal operating environment for cyclical industrial companies, but GE is lower by about 44% year-to-date, a loss that’s far worse than the dismal 25% shed by the Industrial Select Sector SPDR (NYSEARCA:XLI).
The impact of Covid-19 is proving palpable for GE. In the first three months of this year, the industrial unit, one of the few crown jewels remaining for GE following a slew of asset sales, lost $800 million worth of operating profit, something management attributes to the virus. Worse yet, the business bled $1 billion in cash.
GE’s industrial unit includes the jet engine business, which has been dramatically reshaped by Covid-19. Boeing (NYSE:BA), a GE client, and its carrier customers confirmed that Covid-19 will leave a mark on the commercial airline industry.
That’s a reality that’s impossible to avoid. Culp acknowledges GE faces a long road ahead before the jet engine business looks anything like it did in 2019.
GE Capital, the company’s financial business, is integral to the GE stock thesis, bullish or bearish. Management is looking for a debt-to-equity ratio here of 4x, which it’s currently under by a modest margin. The unit carries $55 billion in liabilities against $15 billion in equity.
That’s the good news … sort of. GE Capital faces headwinds in the form of its primary operating realms: aviation and energy. GE Capital Aviation Services (GECAS) is altering its order book to accommodate lost production of Boeing’s 737 Max. With the global economy slumping and carriers cutting back on routes, they’ll also take delivery of fewer planes, something Boeing’s sluggish first-quarter delivery slate reflects.
Fewer new jets means reduced leasing opportunities for GECAS. Then there’s the energy unit, which to be fair, lends to both traditional and alternative energy producers. With oil prices plummeting, producers are pulling back on exploration activities. That means less needs for gear, such as rigs, and that reduced demand pares financing opportunities for GE Capital.
Weakness in these vital GE end markets is expected to have an adverse impact on 2020 free cash flow (FCF).
“Fitch estimates FCF in 2020 will become negative compared to positive FCF of more than $4 billion in 2019,” said Fitch Ratings. “The decrease reflects the impact of the coronavirus outbreak on GE’s end-markets, particularly Aviation that generates the majority of GE’s FCF and offsets negative FCF in the Power and Renewable Energy segments.”
Bottom Line on GE Stock
For those insisting on being bullish on GE, there’s a silver lining in the form of an improving balance sheet. The company is proving adept at selling assets, though plans to divest its Baker Hughes stake are ill-timed due to low oil prices.
Even with that, the company has $89.6 billion in cash on hand as of the end of the first quarter against debt of $85 billion. In recent years, asset sales were aimed at reducing liabilities. But amid the coronavirus pandemic, it’s reasonable to expect GE will sit on some of that cash this year in order to reduce its burn rate and have some dry powder in the event the economy further deteriorates.
In this environment, cash is an excellent arrow for a company to have in its quiver and it’s a trait investors should embrace. However, the aforementioned near-term headwinds facing the jet engine and capital businesses are too great to ignore, meaning investors should deploy capital elsewhere.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.