Since early spring, broader equity markets in the U.S. have been charging ahead. However, General Electric (NYSE:GE) stock is still down close to 44% year-to-date. In fact, GE stock has been a poor investment over the past five years. In July 2016, the shares traded over $32. Now they are around $6.40.
Even before the novel coronavirus uncertainty hit our shores, it was proving hard for the troubled conglomerate to regain investor trust for the long term. Its sales have consistently fallen over the last few years. In late July, the company reported Q2 earnings that showed that the pandemic hurt each of its major operating units. In the coming weeks, I expect GE stock to continue trading in a range between $6 and $6.50. Long-term investors with a two-to-three year horizon may consider buying General Electric shares if the price goes below $6.
How Q2 Results Came
Although General Electric reported a revenue figure that slightly beat analyst expectations, the bottom line took a bigger-than-expected hit. Revenue fell 24% year-over-year to $17.7 billion. Adjusted net loss was 15 cents per share, compared to adjusted EPS of 16 cents a year earlier. Analysts were expecting a loss of 10 cents.
Investors paid attention to four segments:
- Power revenue down 11% YOY.
- Renewable Energy revenue down 3% YOY.
- Aviation (most important segment) revenue down 44% YOY.
- Healthcare revenue up 21% YOY.
Orders, revenue, and thus profits were down in all of these divisions. On the bright side, healthcare turned a profit, because of increased demand for ventilators used in Covid-19 treatment.
The quarterly results showed that for the company to report better numbers, strength in the group’s crown jewel, aviation, is crucial. 2019 marked 100 years of flight for GE Aviation, which primarily builds and services aircraft engines. In Q2, its operation loss was $680 million, compared to a $1.385 billion profit a year ago. During the second quarter, orders tumbled 56% YOY, contributing to the loss.
Yet, given the decrease in aviation businesses worldwide due to the pandemic, GE’s numbers will likely make a gradual recovery. The markets for new jets has been dismal. And investors realize this grim fact. Following the results, investors sold off the stock. On July 31, it hit an intraday-low of $6. Since then, GE stock has somewhat recovered.
GE Stock Will Likely Stay Range-Bound
In March 2019, CEO Larry Culp called 2019 a “reset year” and urged patience during what was portrayed as a multiyear turnaround. However, due to the pandemic, the promised turnaround in General Electric is not happening yet. And 2020 is fast becoming a year of free cash flow declines.
In the Q2 statement, Culp said, “while earnings was negative $(0.15) and Industrial free cash flow was negative at $(2.1)B, our Industrial free cash flow came in almost $2B better than the midpoint of the guide we provided at a conference in May. This was primarily due to working capital improvement with better than expected collections across all businesses… [W]e expect to return to positive free cash flow in 2021.”
Yet if the company cannot go industrial cash flow positive in 2021, there will still be headwinds for the shares. Although I believe the turnaround will eventually happen, it possibly will not be until 2022. Investors should also note that becoming industrial cash flow positive will not necessarily mean profitability for the company.
And without the fundamentals, the stock cannot have the momentum to go up. Furthermore, 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 almost as volatile as the broader market.
Finally, the stock is also among the most-widely held Robinhood stocks. Therefore, investors should be ready for wide price swings in GE shares. In case of an upcoming profit-taking in the markets in the fall, it is likely that traders will push GE stock to $6 or even below.
The Bottom Line
The post-Covid-19 future will be different than the near past for many companies. Both GE Aviation and the overall company will need to use this reality to be even more aggressive in the steps taken to turn the business around.
GE stock is likely to be range-bound for now. In the coming weeks, I expect the shares to trade mostly between $6 and $6.50. In case of a broader market sell-off, then a dip below $6 is possible.
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., Oct. 16-expiry. Such a covered call position would enable to you to participate in a potential up move and also offer some downside protection.
If your time horizon is long term, you may consider buying GE stock if it goes below $6.
Finally, those investors who would like some GE exposure but are concerned 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 include the Vanguard Industrials ETF (NYSEARCA:VIS), the SPDR S&P Kensho Clean Power ETF (NYSEARCA:CNRG), the First Trust Global Wind Energy ETF (NYSEASRCA:FAN), or the SoFi 50 ETF (NYSEARCA:SFYF).
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. She also publishes educational articles on long-term investing. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
