General Electric (NYSE:GE) is up 21% over the past month and higher by 38% off its March lows. While those are impressive statistics, now comes the hard part for GE stock.
Consider one of the primary reasons why GE and fellow downtrodden industrial giant Boeing (NYSE:BA) are recently rallying. That being data confirming that travelers are eager to get on planes and take vacations again even though there’s not a vaccine for the novel coronavirus.
There’s no getting around the fact that increased travel demand is a data point that trickles down a Boeing, which makes passenger jets, or a GE, a manufacturer of jet engines.
Still, those recent airline data points aren’t the type of better-than-expected that can sustain lengthy rallies in the likes of Boeing or GE. What I’m saying is that while bookings are topping forecasts, those projections are coming from such a low base that they’re not all that hard to beat. Additionally, the airline industry is nowhere close to being out of the Covid-19 woods.
On June 9, the International Air Transport Association (IATA) said the global airline industry will bleed $84.3 billion this year as revenue plunges 50%. Putting a loss of $84 billion into context, that’s all of GE plus another $10 billion.
“Financially, 2020 will go down as the worst year in the history of aviation,” said IATA CEO Alexandre de Juniac.
One day doesn’t make or break a trend, but underscoring GE’s sensitivity to airline news, the stock slumped 5% following the IATA report.
Murky Outlook for GE Stock
One of the primary catalysts for the recent bullishness in GE is air travel demand exceeding expectations. Here’s why that spark is potentially limited and risky for GE and other companies with exposure to the airline industry.
First, the U.S. economy is still in the early innings of the post-coronavirus recovery. Equity markets are on a tear and the May jobs report notwithstanding, there’s still a lot of work to be done to get folks back to work and to jolt consumer confidence. The long slog back to the pre-virus economy is one reason why airlines are still keeping hundreds of planes on the ground and hundreds of routes off their menus.
Second, there is the time component. As in how long it’s going to take for the airline business to look like its 2019 self again. Estimates vary on that front, but the rosiest of assumptions state 2022 could have a 2019 feel to it while more conservative estimates indicate it could be 2023 or 2024 before carriers see pre-virus capacity return.
To put a bow on all that, after the recent surge in GE stock, what investors are buying into now as it pertains to the aviation business is that airlines and the economy will sustain some momentum and materially bounce back in 2021.
That timetable could try investors’ patience, but on the upside, aviation is one business where GE CEO Larry Culp can expand margins, an attainable goal via cost-cutting and spending reductions.
The Bottom Line for GE Stock
To be sure, the GE investment thesis doesn’t solely revolve around aviation, even with all the near-term correlation to airline equity gyrations.
Against the backdrop of an aging population and technological advances, GE’s other crown jewel – its health care business – remains a source of allure for investors willing to stick with the stock over the long term.
“Additionally, we think positive secular trends in GE Healthcare include an aging population and greater access to care,” said Morningstar. “Despite the deflationary nature of the business, we think GE’s digital initiatives can improve its mix and drive additional sales and margin growth.”
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.
