At the beginning of the year, General Electric (NYSE:GE) seemed to be on the upswing. GE stock delivered impressive 2019 returns and new CEO Larry Culp was poised to take the firm to new highs in 2020.
At the beginning of January, I said GE made for a good bet amid the uncertainty at Boeing (NYSE:BA). At the time, Boeing’s MAX jetliner issues were costing the firm, and the stock was wracked with uncertainty. Back then, I believed investors were underestimating GE’s ability to make a comeback.
GE Stock Can’t Climb Unless the Economy Does Too
Fast forward a few weeks, and the novel coronavirus has changed that view completely. The same fundamental reasons I believe GE stock offered solid value back then are still true today. I believe in Larry Culp’s ability to turn the business around.
He’s been working to overhaul the firm’s culture by cutting costs and running a much leaner organization. He’s promised to pull back the curtain and help investors understand GE’s financials with more revealing quarterly announcements and regular business updates.
Unfortunately, much of my optimism regarding GE’s turnaround was dependent on the booming economy we were all enjoying in the pre-coronavirus world.
Q1 Shows the Depth of Pain GE Will Feel
GE’s first-quarter results were going to be Culp’s moment of triumph — when he could show investors that his presence was making a difference. But the coronavirus changed all of that. When you excluded the $1 billion worth of cash flow and $800 million in operating profit that the coronavirus drained from GE’s operations in Q1, the firm showed some signs of life.
But the reality is that you can’t exclude those enormous costs, nor can you discount what they’ll be in the future. GE was already struggling with Boeing’s missteps; now the entire aviation industry is on its knees. That’s bad news for the firm, whose largest business is closely tied to producing new planes.
Old Problems Magnified
With its largest business handicapped for the foreseeable future, the rest of the problems at GE look much more significant. The firm is dragging dead weight with its financial services business GE Capital, and GE Power was costing the firm nearly $1 billion in cash in 2019 when the economy was firing on all cylinders.
Meanwhile, Culp and his management team were working to pay down the firm’s enormous debt pile. Notably, the firm recently refinanced some of its debt as it works to build liquidity and weather the coronavirus-induced storm. But we still don’t know how long the economic pain will persist, making companies like GE with sizable debt obligations a risky way to go.
It’s Not All Bad
My views about the future of the stock market are pessimistic. I don’t think we’ve seen the bottom yet and I’m hesitant to jump in with both feet with any stocks, let alone those that were struggling before we got into this mess.
But that doesn’t mean I don’t like GE stock for the future, because there is a lot to like about the stock once the economy gets going again. In a letter on LinkedIn, Culp underscored some of those qualities.
For one, he noted that the aerospace division isn’t just supplying commercial airlines. For example, he stated that, “GE Aviation powers two-thirds of the military aircraft around the world.”
Plus, Culp pointed out that GE has found business opportunities in the Covid-19 crisis. The firm is currently using 3-D printing to make much-needed supplies like face shields.
The Bottom Line for GE
GE stock isn’t going to zero, but it’s also not a great choice in the current market. I think there’s still a lot to like about General Electric’s turnaround potential, just not right now. Culp is the right man to get the company through this rough patch, but investors have to understand that it’s going to be rough.
For now, with the coronavirus’ outlook still very murky, I’d be hesitant to pick up stocks that don’t have ironclad financials. I’d also be hesitant to jump on board with a firm so closely tied to the airline industry. No one can make an accurate prediction about the direction of the industry over the next six to 12 months because no one can be sure what will happen with Covid-19. With that in mind, I’d keep GE stock on your watchlist but hold off on buying.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
