Despite its steep problems, the airline industry is still looking fairly resilient, a vaccine for the novel coronavirus is very likely on the way, and coronavirus case totals are starting to get under control. Meanwhile, wind-energy capacity is rapidly increasing around the globe. Given all these points, the longer-term outlook of General Electric (NYSE:GE) stock remains very strong.
In 2019, GE’s aviation unit was its largest division by revenue and profits. Amid the pandemic, the unit has taken a big hit. But there are multiple signs that Aviation’s main customers — large airlines — continue to do much better than in April and May and are not going to collapse.
On July 20, evaluating U.S. airlines’ bookings, Bank of America wrote:
“The continued deceleration in domestic volumes is driven by leisure with leisure volumes down -63.3% y/y in the latest data vs -62.8% the prior week and -50.4% in mid-June. This slowdown coincides with a rise in virus cases across the country and is in line with Delta’s comments on its earnings call last week citing a choppy recovery with a slowdown in demand growth in recent weeks.”
But a 37-percentage-point year-over-year decline is much better than the situation we saw in April and May, when the overall traffic in American airports was down 95% year-over-year.
As a result of the rebound, combined with cost-cutting, the cash-burn rates of the large airlines are under control. For example, Delta’s (NYSE:DAL) daily cash burn dropped to $27 million in the second quarter from $100 million in late March, while Southwest’s (NYSE:LUV) cash-burn rate fell to just $16 million per day in June.
Importantly, Southwest is only laying off 4,400 of its employees, who accepted the company’s buyout offer, while 12,500 are going on voluntary, long-term furloughs. That works out to a combined total of 27% of its active employees, while only 7% of its workforce has permanently left the company. Further, Southwest VP Bob Jordan said on July 23 that “I’m hopeful we won’t need additional” layoffs or furloughs. Taken together, the data indicates that the position of Southwest is not all that dire.
Also positive for the airline sector and, by extension, GE stock, is the fact that “two of Boeing’s (NYSE:BA) biggest commercial airline customers say they remain committed to the 737 MAX despite delays.” as Seeking Alpha recently reported.
The Coronavirus Hotspots Are Easing
The increases of daily coronavirus case counts in some Southern and Western hotspots — which have been responsible for the recent deceleration of air travel — are showing signs of easing in recent days.
For example, with counties representing the vast majority of Florida’s counties reporting data on the afternoon of July 27, the state’s daily new cases stood at 8,900, while its daily death total was 78. Even if the daily case count for July 27 rises to 9,300, that would be the state’s lowest total since July 14. If the death total rises to 88, that would be the lowest weekday total since July 19.
Meanwhile, as of the afternoon of July 27, Arizona’s daily new cases stood at 1,813, while the state was reporting zero deaths for the day. The daily case total was well below the peak of well over 4,000, reached earlier in July while the zero deaths is obviously great news. Arizona’s daily new case total has not come close to 4,000 since July 17.
If the daily case and death totals of most of the hotspots continue to drop, fear of flying will likely recede to the levels of late June, and the governors who have imposed quarantines on those who have visited the hotspot regions will come under tremendous pressure to rescind their decrees. As a result, the airlines’ revenue and traffic would rebound again, resulting in them using more planes and utilizing more of GE’s services for their engines.
Finally, multiple companies continue to progress towards a vaccine, and a vaccine could be introduced as early as October.
Wind Energy Is Proliferating
GE’s renewables unit specializes in building wind turbines. Demand for the machines appears to be growing rapidly around the world. For example, New York state is looking to add up to 2.5 gigawatts of offshore wind power, while Europe wants to increase its wind-energy capacity to 339 gigawatts, versus 169 now. Wind energy is still growing meaningfully in Texas and China.
The Bottom Line on GE Stock
All of the large airlines are going to survive. In all likelihood, they will get a tremendous boost when a vaccine is introduced towards the end of the year. Past pandemics in 1957 and 1968 did not result in longstanding declines in flying demand, and this pandemic will be no different.
Further, there’s a chance that the demand for flying could experience a smaller rebound in the near-term. In light of these points, GE’s aviation unit could recover meaningfully in Q3 and will likely benefit from a huge rebound in Q4 and Q1 of 2021.
Finally, as the growth of wind power accelerates and the company’s renewables unit improves under CEO Larry Culp, that division’s results should surge over the longer term.
Based on the valuation of GE stock and the bearishness towards the name of many on Wall Street, I don’t think these positive catalysts are reflected in the shares. Therefore, I continue to recommend that long-term investors buy the stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, oil stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he owned shares of GE.
