Investors Should Avoid General Electric Stock

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It’s not been a good year for General Electric (NYSE:GE) or GE stock. 

General Electric (GE) sign on a GE factory in Fort Wayne, Indiana.

Source: Jonathan Weiss / Shutterstock.com

For the former, the novel coronavirus has hurt its aviation business, arguably its strongest industrial unit. In the first quarter, the segment’s orders were down 14% over last year, revenues were down 13% and profit was down 39%. While those numbers aren’t great, it still managed to generate a $1 billion profit, so all is not lost.   

The bigger problem is future revenues and profits. 

Is the Aviation Business Viable?

InvestorPlace’s Josh Enomoto recently wondered if its aviation business is even viable given Covid-19 appears to be getting worse in the U.S. If people don’t fly, airlines don’t buy planes, and aircraft makers don’t buy jet engines. It’s the trickle-down effect.

It’s not an unreasonable question.

As for GE stock, since its February and March descent from $13 down to $6, it has traded in a range between $6 and $8. The question on everyone’s mind is whether it’s found a floor and double digits are around the corner or is the next economic setback from the pandemic going to send it into penny-stock range. 

In early April, when it was trading around $7.30, I thought it was a buy because the long-time bear — Stephen Tusa of JPMorgan Chase — raised his price target by $3 to $8 and his rating from “sell” to “neutral.” As long as he was on board, it seemed like a reasonable play. 

However, in June, I changed my tune. With Covid-19 taking hold, and the prospects of GE’s free cash flow disappearing for some time to come, I just couldn’t recommend its stock. 

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,” I wrote June 19. “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.”

I concluded my June piece by stating GE stock is not something you should own until the country is virus-free. 

30% Upside for GE Stock

InvestorPlace’s Thomas Yeung recently suggested that GE stock has 30% upside. He argued that General Electric’s recession-proof jet engine business is an excellent way to play airline stocks. Why? Because the airlines will still have to pay for maintenance service on its idle engines. 

It’s a compelling argument and one that has merit. However, that doesn’t help GE’s future sales, nor should it give CEO Larry Culp any comfort. If airlines go broke, there won’t be much money to pay for service on aircraft that are redundant. 

This leads back to free cash flow and the company’s future survival. 

Yeung points out that the company’s earnings before interest and taxes (EBIT) ought to grow by 150% over the next three years, from $3.7 billion in 2020 to $9.2 billion in 2022. As a result, GE’s profits should skyrocket. 

But what happens if free cash flow stays negative? There’s no way GE stock remains at $7, or more optimistically, moves higher.

After Tusa raised his price target to $8 in March, he has since lowered it back to $5, suggesting that GE is a value trap, with imploding free cash flow and increasing leverage. 

The Altman Z-Score Doesn’t Look Good

As mentioned earlier, Josh Enomoto wondered about the aviation business’s survivability. Well, as I look at the company’s current Altman Z-Score of 1.43 — the score quantifies the possibility of a company going bankrupt within the next 24 months — I wonder about the entire company’s survival. 

To recap, any stock with an Altman Z-Score below 1.81 is in distress territory. It changes from financial report to financial report as sales, EBIT profits, market capitalization, total assets, total liabilities, working capital and retained earnings change. 

If, when GE reports earnings on July 29, these numbers improve, the figure rises. If they get worse, the value goes lower. 

My guess is it will go lower before it goes higher. For this reason, along with the fact Tusa is back to a target price of $5, I don’t believe it’s a buy at this time. 

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.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/general-electric-ge-stock-avoid-for-now-coronavirus/.

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