I did so partly because permabear JPMorgan analyst Stephen Tusa lowered his 12-month price target back to $5 after raising it to $8 in early April. Equally important, Tusa simultaneously had upped his GE rating to “neutral” from “sell.”
My other concern about GE was that it’s a couple of bad quarters away from possible bankruptcy. That seems ridiculous for a $54-billion stock, yet here we are. It has an Altman Z-Score of 1.42, well within the distressed zone, which suggests it could enter bankruptcy proceedings within the next 24 months.
However, I’m always willing to listen to the bullish crowd. Amongst InvestorPlace writers, David Moadel would be considered quite positive about GE’s future. Recently, Moadel discussed how the company’s pivot to renewable energy would reward shareholders over the long haul.
I’m not so convinced. Here’s why I feel this way.
How Much of a Catalyst Is Renewable Energy for GE Stock?
As my colleague mentioned in his Sep. 29 article, GE was selected to supply 190 Haliade-X turbines for the Dogger Bank wind farm, the world’s largest offshore wind farm in development. Once completed, it will supply over 4.5 million homes (5% of the UK’s overall electricity demand) with renewable energy.
“These turbines are a true testament of how hard the offshore wind industry is working to continually innovate and drive down costs and we look forward to working with GE Renewable Energy to help us deliver the largest offshore wind farm in the world,” stated Steve Wilson, Dogger Bank’s Project Director at SSE Renewables.
I’m as big a fan of renewable energy as the next person, so I agree with my colleague that this is a big deal. But how much does it actually bring the company in revenue? Estimates put the cost to manufacture and install the Haliade-X turbine at $400 million.
In the second quarter, GE’s renewable energy segment had $3.5 billion in revenue. That’s down from $3.6 billion a year earlier. In terms of profits, the segment lost $200 million in the quarter, the same amount as it lost in Q2 2019.
It had $25.9 billion in future revenue from a backlog perspective, which is down from $27.5 billion at the end of December, but slightly higher than a year earlier.
So, while renewable energy has the potential to deliver big profits down the road, right now, it’s losing 5.6 cents from every dollar of sales. That’s four-tenths of a cent higher than a year ago. In the first six months, GE lost 7.4 cents on a dollar of sales, 1.4 cents higher than in the same period a year ago.
When you consider that GE had almost $30 billion in free cash flow in 2005 and only $2.5 billion in the trailing 12 months, the odds of renewable energy providing much of a catalyst in the near term are slim to none.
Which is a big reason why GE stock is stuck in a range between $6 and $7 and has been since mid-June.
A Bigger Catalyst Is Needed
In my opinion, it’s going to take a much bigger catalyst than the Haliade-X turbine announcement to push its share price into double digits — something like Boeing (NYSE:BA) getting its act together on the 737 Max. Federal Aviation Administration chief Steve Dickson recently flew the plane and generally liked how it performed.
“I like what I saw on the flight,” said Dickson, a former airline pilot who flew earlier versions of the 737. “That doesn’t mean I don’t have some debrief items going forward. [N]ot so much in the procedures, but in the narrative that describes the procedures.”
In the latest quarter, GE’s aviation business (engines) saw sales drop by 44% while losing $680 million. A year ago, the division made almost $1.4 billion in operating profits from $7.9 billion in sales. The 737 Max caused much of the damage.
So, while I think renewable can play a bigger part in GE’s possible recovery, I don’t think that will happen in 2021 or even 2022. That’s farther down the road. Right now, the 737 Max is the lynchpin to future success.
Renewable energy is not the short-term answer shareholders are looking for, and it might not even be the long-term solution for the company. As I said in July, GE is not a stock you want to own while the novel coronavirus and Covid-19 is still raging.
Farther out, depending on what happens over the next six to 12 months, I could change my mind, but not at this time.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.