Although many shares have recovered substantially from their March lows to even make new 52-week highs, General Electric (NYSE:GE) stock is still down close to 40% year-to-date. Over the past five years, the industrial giant has been a poor investment. In July 26, the shares traded over $32. Now they are around $6.7.
Put another way, even before the recent economic uncertainty hit our shores, it was proving hard for GE stock to regain investor trust for the long-term. Its sales have consistently fallen over the last few years. The group is expected to report earnings in late July. If you are not yet a shareholder in GE, you may want to analyze the upcoming quarterly report to see if fundamental metrics are beginning to show potential strength for the rest of the year. Long-term investors may consider buying the dips, especially if the price goes toward $6. Let’s see why.
What to Expect from Q2 Earnings
When General Electrics reported Q1 earnings in late April, it posted total revenue of $20.524 billion, a decline of 8% YoY. Adjusted EPS came at 5 cents, missing analysts’ estimates.
The company reported revenue in five segments:
- Power, revenue down 13% YoY;
- Renewable Energy, revenue up 26% YoY;
- Aviation (most important segment), revenue down 13% YoY;
- Healthcare, revenue up 26% YoY;
- Capital, revenue down 14% YoY.
CEO Lawrence Culp said, “The impact from COVID-19 materially challenged our first-quarter results, especially in Aviation, where we saw a dramatic decline in commercial aerospace as the virus spread globally in March… We’re embracing today’s reality and accelerating our multi-year transformation to make GE a stronger, nimbler, and more valuable company.”
As global travel came to a halt earlier in the year, profit in the Aviation division fell by 39% to $1.005 billion from $1.66 billion. Orders also tumbled 14%. On the other hand, in Healthcare, profit increased to $896 million from $781 million in the year-earlier period. The company saw a surge in “demand for products used in the diagnosis and treatment of COVID-19.”
Management highlighted that it would cost cuts of more than $2 billion and take various measures to strengthen the balance sheet. It also warned investor that Q2 would likely be worse because of the pandemic.
Given the uncertainty in the economy, investors will need to see solid numbers in the upcoming report to decide GE is a good value in the rest of the year.
What May Derail GE Stock Further Now
Q1 results of April were overall in stark contrast to the solid Q4 2019 quarterly results reported in January. At the time, the numbers topped analyst expectations. Revenue hit $26.24 billion and EPS came at 21 cents.
In March, CEO Larry Culp called 2019 a “reset year” and urged patience during what has been portrayed as a multiyear turnaround. If 2020 becomes a year when free cash flow declines significantly, then the turnaround management has been working on may take a lot longer than initially envisioned.
Thus there may still be short-term headwinds for the shares. GE is a widely held and actively traded stock. Average daily volume stands around 76 million shares. And its beta is about 0.96. So the price is likely to be as volatile; volatile as the broader market. Therefore, investors should be ready for wide price swings in GE shares, especially during this busy earnings season.
Despite the gloom nowadays, I’d urge investors to pay attention to the group’s crown jewel, i.e., Aviation. 2019 marked 100 years of flight for GE Aviation, which primarily builds and services aircraft engines. InvestorPlace contributor David Moadel has recently written how the new CEO of GE Aviation “could invigorate” the business.
Yes, aerospace will likely make a gradual recovery, but it may still be the engine to propel the shares higher in the long run. The post-COVID-19 future will be different than the near past for many companies. Both GE Aviation and the overall company may use this reality to be even more aggressive in the steps taken to turn the business around.
The Bottom Line on GE Stock
Q2 2020 earnings season kicks off this week, led by the big banks. Therefore, investors should be ready for increased volatility in broader markets. GE stock is likely to be affected from such potential choppiness, too. Long-term investors may want to consider GE shares if the price declines toward $6.
If you already own GE stock, you might want to stay the course and hold onto your position. Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., September 18-expiry. Such a covered call position would enable to you to participate in a potential up move and also offer you some downside protection.
Finally, those investors who would like some GE exposure but are doubtful about the prospects for the coming months may consider buying into an exchange-traded fund (ETF) that has stock in GE as a holding. Examples such ETFs would include the Industrial Select Sector SPDR Fund (NYSEARCA:XLI), the First Trust Global Wind Energy ETF (NYSEASRCA:FAN), or the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
