Never let it be said that the General Electric (NYSE:GE) saga hasn’t been an interesting one. Whether or not you own General Electric stock, to see this once-iconic industrial name fall out of favor and then fight so hard for its survival has been fascinating to watch. It’s also turned into an incredible case study of what not to do, only to then become an — even if not yet definitely successful — example of a respected turnaround effort.
The challenge for current and would-be owners of General Electric stock is looking past the noise and dust and figuring out what’s really going on with the company.
It’s still a moving target, with the GE stock price ebbing and flowing thanks to an ever-changing set of valuation criteria. But a handful of these factors are important enough and permanent enough to focus on right now. Here’s a look at the top three pros and cons of General Electric stock.
3 Pros of General Electric Stock
1.Improving Investor Sentiment
Just a few months ago, GE could do nothing right. Falling from a 2016 peak near $33 to what finally looked like a bottom near $12 in September of last year, General Electric stock had the rug pulled out from underneath it again in November. In December, it fell below $7.
Since then, GE stock has bounced back to $9. That price is still only a fraction of its former self. But it’s the most sustained bullishness towards General Electric stock we’ve seen from investors in years. That’s a start.
2. New, Outsider CEO
Sometimes a new CEO has to have prior experience in a sector related to the company he or she is leading. Other times, the CEO needs to have worked for years at the company. But occasionally an outsider’s point of view is needed to see what others can’t (or won’t) about a company’s implosion.
Larry Culp, the former CEO of Danaher (NYSE:DHR), thus far has been a fresh set of eyes that have sought the truth, good or bad. Truth-seeking can lead to intelligent decision-making. Culp’s approach contrasts with that of his predecessor, longtime GE CEO Jeff Immelt, who in retrospect has been criticized for cultivating a “success theater” that failed to solve problems.
3. Pushing Harder to Divest
He’ll only go down as a footnote in GE’s history, but between Immelt and Culp, John Flannery was at the helm for roughly a year.
He was brought in largely to repair the damage sustained under Immelt’s watch. Flannery sought to accomplish that task primarily by selling some divisions and divesting from others to offset the company’s growing debt
Flannery was in charge when General Electric’s locomotive unit was sold to Westinghouse Air Brake Technologies (NYSE:WAB). He wasn’t moving quickly enough to suit most shareholders, though, while Culp seems to have picked up the pace.
3 Cons of GE Stock
1.Tons of Debt
It’s the 800-pound gorilla in the room. As of the end of the third quarter, General Electric was sitting on $115 billion of debt and another $70 billion worth of insurance and compensation liabilities.
It can’t afford to leave those liabilities on the books, but selling revenue-bearing assets may not help enough to matter. Gordon Haskett analyst John Inch recently crunched the numbers, concluding “By subtracting asset sale proceeds from total company liabilities of $225bn to $274bn, we derive total company (post sale) liabilities of $144bn to $203bn. After then incorporating the market value of the Industrial assets ($71bn to $78n) and Capital assets ($111bn to $129bn), we impute a value for GE equity between -$2.47 to +$7.11, or just over $2/share at the midpoint.”
2. The Power Division
GE is a diversified conglomerate that needs all of its divisions to perform well. But the one unit that absolutely has to shine isn’t and may not for a long, long while.
That’s the Power arm, which accounts for roughly one-fifth of the company’s revenue. The unit’s sales fell 33% during the third quarter, resulting in a significant loss for the unit. Moreover, the Power division didn’t perform much better in Q4..
3. Analysts Are Still Skeptical About General Electric Stock
While investors may be on board with the turnaround effort thus far, analysts aren’t. Any rebound that’s going to last will need the support of these pros sooner rather than later. As of the latest look, the analyst community collectively rates General Electric stock closer to a “Hold” than a “Buy” (that’s alarming, given analysts’ generally bullish bias). And that’s after a number of upgrades of General Electric stock that occurred between October and December.
The doubters aren’t letting up. JP Morgan analyst Stephen Tusa, right before GE’s Q4 earnings were released , reiterated his concerns about its cash flow.
The Bottom Line on General Electric Stock
There’s more working in favor of GE stock than not right now, even if part of that tailwind is rooted in the fact that things literally couldn’t get much, if any, worse. All of the company’s problems are on the table and priced into General Electric stock.
Nevertheless, sentiment can overwhelm facts, and right now General Electric stock has proven it’s vulnerable to mere doubts.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
