At the beginning of 2020, General Electric (NYSE:GE) was hoping this would be the year that marked its turnaround. But GE stock is down nearly 30% year to date and has been on a downward trend since 2016.
The company was hit hard during the 2008 recession and has been trying to slowly rebuild under CEO Larry Culp. Company management was hoping that this would be the year that its earnings and free cash flow finally improved.
And for the first couple months of the year, it looked like a turnaround may be in the cards for GE stock – that is, until the novel coronavirus hit. Company management have been trying to turn things around but hit a snag once the coronavirus pandemic picked up steam.
Travel restrictions and an overall lack of travel demand hurt the airline industry, which also caused problems for GE’s aviation division. This is unfortunate, given that the aviation unit was one of the bright spots in GE’s business model.
The company was forced to cut its workforce and burn through more cash than expected. Here are three things you need to know before investing in GE stock.
All of GE’s Business Units Are Challenged
Right now, the commercial aviation unit is the weakest link to GE’s business model. But truth be told, the company faces short-term challenges across the board.
This was something Culp laid out during his presentation at the 36th annual Bernstein Strategic Decisions Conference. Originally, the company had anticipated that free cash flow would fall between $2 billion and $4 billion during 2020, up from the $1 billion it generated in 2019.
Now, the company expects that its free cash flow is going to be negative for the year. To mitigate these challenges, Culp says the company plans to cut about 25% of its workforce from the aviation unit.
During the second quarter, he expects total outflow to fall between $3.5 billion and $4.5 billion, which is significantly higher than the original estimates of $2.5 billion.
GE Is Selling Off Assets
One of the biggest problems facing GE is its heavy debt load, which is something Culp has been working hard to deal with since he stepped in as CEO. The company still has about $57 billion in outstanding debt.
To reduce its debt, GE has been slowly selling off a number of its business assets, including, most recently, portions of its health care business. GE sold its life sciences division to Dahaner for $21 billion.
And according to the Wall Street Journal, GE agreed to sell its lighting division for $250 million. If the sale goes through, it will be a relatively smaller transaction for GE, but will enable the company to focus on the four main divisions of its business: aviation, power, health care and energy.
It Will Take Time for GE Stock to Recover
GE stock may eventually bounce back, but it’s not going to happen anytime soon. The company’s commercial aviation business will improve, though there’s no telling how long it will take.
Company management was anticipating that recovery would be slow before the Covid-19 pandemic hit, so this extends the timeline even further. And according to J.P. Morgan analyst Stephen Tusa, Culp’s estimates at the investor conference are likely a little too optimistic.
The good news is that the company finally has strong leadership to guide it forward. Culp has done a good job of helping GE turn things around since he became CEO in 2018.
GE stock could be a good investment, but you’re going to need to be willing to stick around for the long term.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans, and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
