General Electric’s (NYSE:GE) stock price is nearing a 30-year low. With this in mind, shares represent a buying opportunity for bargain hunters. However, be warned. GE stock requires patience and an appetite for near-term risk.
GE stock closed Wednesday, May 13, at $5.79 a share, hitting a 29-year low for the Boston-based conglomerate. Frankly, it’s been a going concern since Thomas Edison founded it in 1889. And the stock price has faced even more suffering in recent months as the novel coronavirus weighed on GE.
General Electric’s various business segments, which range from energy and manufacturing to venture capital financing and healthcare, have all taken a hit. Shares have fallen 55% just since mid-February.
GE Aviation Is Grounding GE Stock
Analysts agree that the stock is getting pummeled from all sides — but its ties to the airline industry are particularly dangerous. Airlines have come to a standstill thanks to the closure of international borders and public fears of flying amid the pandemic.
GE Aviation is the company’s largest business segment, with revenue of $6.9 billion in the first quarter. The next biggest segment is GE Healthcare, which added $4.7 billion in revenue during the first three months of 2020.
GE Aviation is one of the largest makers of jet engines and components in the world, and with planes sitting idle on tarmacs, the business unit has been brought to a grinding halt. GE stock fell sharply last week after Boeing (NYSE:BA) CEO David Calhoun predicted that at least one major airline will be out of business by year’s end. Unfortunately, Calhoun’s warnings didn’t stop there. He also predicts that the U.S. airline industry will need a minimum of five years to recover from the pandemic.
The fact that GE Aviation CEO David Joyce announced “permanent” job cuts — reducing its workforce by 25% — only added to the gloomy sentiment. Plus, Warren Buffett said he has sold all of his airline stocks.
Is General Electric Still Attractive?
Despite the drubbing, GE stock is trading at a discount and could be a bargain for investors with long-term time horizons and the stomach to ride out near-term volatility. GE’s price-earnings ratio is at 10.9, compared to 18.3 for the broader operations industry. Note that a lower multiple is considered more attractive than a higher one.
Additionally, GE has many business segments that could help offset losses in aviation. These include renewable energy (wind), conventional energy (gas turbines) and healthcare (medical imaging equipment). Gas turbines in particular could see demand rise with increased use of gas for electricity generation.
And the airline industry will bounce back with the broader American economy — whether the recover is V-shaped or L-shaped. Long term, Americans will still travel by air.
It is also worth mentioning that GE stock has been here before. In the late 1970s and early 1980s, the company was a mess. It was overburdened with debt and non-performing business segments. However, after famed CEO Jack Welch took the helm in 1981, GE stock returned an astounding 4,280% to investors in the 20 years through 2001.
The question now is, can GE adapt coming out of the Covid-19 pandemic and once again shift its focus to boost profitability and return value to shareholders?
Beyond the current outlook for the airline industry, a number of risks remain for GE. The company made a number of strategic missteps before the global pandemic hit. These include selling off its profitable biopharmaceutical unit to Danaher (NYSE:DHR), and the acquisition of energy assets in late 2015 at a time when the market for heavy-duty gas turbines began to slump.
Moving forward, investors will feel the loss of the biopharma unit. It was responsible for $1.2 billion of GE Healthcare’s $2.5 billion in free cash flow during 2019.
Additionally, GE forecasts ongoing struggles for its gas turbine business over the near term, while selling wind turbines as part of its renewable energy segment has proven to be a tough slog. GE’s renewables segment has also experienced supply-chain challenges.
If that wasn’t enough, there are also concerns about the conglomerate’s balance sheet. Numerous analysts cite its $48 billion in industrial debt (nearly twice the level of a typical industrial company) and pension obligations of $100 billion as areas of worry.
The Bottom Line: Bulls Win Over Bears
Regardless of the current problems, analysts remain bullish on GE stock at its current price. Half of the 14 analysts covering GE have buy ratings, the other half have it at hold. Their average price target is $8.53 — suggesting 37% upside over the next 12 months.
Analysts often point to the fact that GE has $35 billion in available lines of credit from banks. And, the company’s industrial debt level fell by $7 billion in 2019. GE has also instituted $2 billion worth of operational cost-cutting measures since the outbreak began.
All together, analysts seem to agree the company is well-positioned to weather the current storm.
For investors with an appetite for risk, now may be the time to take a position in GE stock. Just make sure to be cautious given the current environment and potential downside.
As of this writing, Joel Baglole did not hold a position in any of the aforementioned securities.