No Free Cash Flow, No Problem, Say the GE Bulls

General Electric (NYSE:GE) CEO Larry Culp announced May 28 that it doesn’t expect the industrial conglomerate to generate positive free cash flow until 2021. Despite the lack of cash flow, there appears to be significant optimism permeating among those following GE stock. 

GE Stock Comeback Story is Delayed But Not Canceled
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That’s good news for long-time owners of GE stock who are hoping the good times from days gone by will soon return.

But will they? Here’s a look at both sides of the coin. 

The Cash Flow Concerns Are Real

Culp, speaking at an industry conference, said that its second-quarter cash burn would be greater than expected because of the issues its aviation business is facing due to the novel coronavirus and limited air travel. 

GE expects to use between $3.5 billion and $4.5 billion in free cash flow in the second quarter, much higher than analyst estimates of $2.5 billion for the quarter. Gordon Haskett analyst John Inch suggested the extent of the company’s cash outflow in the second quarter will be much higher than the rest of its industry peers.  

Assuming it comes in at the high end of the range for free cash flow usage, the company will have burned through $6.7 billion in free cash flow in the first two quarters of fiscal 2020. The turnaround has definitely hit a major bump in the road. 

In fact, Culp has admitted that things have gotten so far off track in 2020, free cash flow is going to be negative in 2020. 

InvestorPlace contributor David Moadel recently discussed the company’s aviation business. He referenced a quote from the division’s CEO, David Joyce, which provided shareholders with very little in the way of good news in 2020. 

The companies that GE sells engines to have reduced production schedules for 2021 and beyond. Cost reductions might reduce the free cash flow outflows, but they can’t eliminate them. 

As Moadel suggests, GE stock is not a great bet at the moment. He wrote on June 16:

“Given the currently unfavorable aviation-market conditions, General Electric stock is primarily only a reasonable investment for patient long-term investors. In the short and medium terms, it’s best to stay on the ground and wish the shareholders a safe trip on their unsteady and somewhat risky flight.”

Oh, and one more thing. 

Joyce, who ran the aviation division for 12 years, announced his retirement on June 15. While the company has a replacement already selected, this isn’t a great time for bringing in a new executive. 

GE Stock Won’t Be Hurt By Cash Flow Downturn

The one thing GE shareholders have going for it is that Culp is a well-respected CEO. If he says the company will have negative free cash flow in 2020, turning positive in 2021, his years in the top job at Danaher (NYSE:DHR) suggests he knows what’s what. He’s given the benefit of the doubt. 

Since Culp’s words of May 28, GE stock has moved sideways, which isn’t a bad thing given the big black cloud hanging over most of the company’s operating units. 

InvestorPlace’s Chris Tyler recently suggested that the bears have it wrong with GE stock.

“This week Bank of America reiterated its buy rating and above-the-market price $11 target on GE,” Tyler wrote June 17. “Analyst Andrew Obin noted that aviation-related write-downs for the company’s Capital Aviation Services unit look manageable and the business should continue to be cash flow positive. Specifically, the firm expects impairments of $800 million to $2.2 billion from the business and average free cash flow of $1.5 billion through 2022.”

At least in the eyes of the research staff at BofA, this cash flow situation is a solution in search of a problem. In other words, it’s not a big deal. 

Tyler believes that if you give GE stock a chance, it could deliver in spades. 

I don’t agree. 

In my last article in May about GE, I argued that the company doesn’t stand a chance in this type of economy, no matter how many strings Culp pulls. He isn’t going to be able to pull a rabbit out of his hat. 

Until we are virus-free, GE is not the kind of stock you want to own. It’s a multi-year turnaround. It’s pretty hard to fix a business when the economy’s in the dumpster. 

The risks of owning GE stock in the short-term outweigh the potential benefits over the long haul. I do not recommend it. 

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.

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