Shares of beaten-up industrial conglomerate General Electric (NYSE:GE) staged their long overdue turnaround in early 2019. GE stock bottomed at $6.40 in early December 2018, and through late February 2019, General Electric stock nearly doubled, climbing to $11.
But that big GE turnaround has come and gone. In March, GE stock traded near $10. In April, General Electric stock was around $9. And, in the month of May, GE ranged between $9 and $10.
In other words, after staging a huge rally through the first two months of 2019, GE stock has been stuck in neutral for the past three months. GE stock has been rangebound in recent weeks because there are simply too many unanswered questions surrounding the future of GE.
A handful of those questions were answered favorably through the first two months of 2019. That’s why General Electric stock rallied. But those answers have stopped coming in, and as they have, GE stock has stopped heading higher.
For the foreseeable future, GE will remain plagued by a lack of clarity regarding its long-term growth prospects.
There is a scenario in which GE stock could rally tremendously. But that scenario lacks clarity and tangibility at the current moment, so General Electric stock will likely remain stuck in neutral for the foreseeable future.
Too Many Questions
When it comes to GE, there are a thousand questions with respect to what “new GE” will look like in five years, and while management is taking the right steps to craft a better future for this company, there are simply too many questions and too little clarity today for GE stock to move much higher in the foreseeable future.
There are a few things GE needs to do in order to become a better, more sustainable, more focused, less indebted, and more profitable company. Those things include shedding both unprofitable and non-core assets, using the proceeds from those asset sales to reduce its debt load, focusing on maximizing the growth of its healthy Aviation business, and investing in next-generation growth businesses like industrial Internet of Things.
Management is executing on these initiatives. In late 2018 and early 2019, GE did shed both unprofitable and non-core assets and businesses. It reduced its debt load and talked about focusing on its growing businesses. Because of all those positive developments, GE stock soared from $6 to $11.
But the upward momentum of General Electric stock stopped once its long-term outlook stopped becoming clearer. Specifically, GE was supposed to spin off its healthcare business, but after teasing the idea in early 2019, management has been quiet on that front for the past few months. Rumors surrounding a spin off of its Power unit haven’t been confirmed or denied. Meanwhile, the company’s deal to sell its Biopharma unit to Danaher (NYSE:DHR) could be in jeopardy after pharma equipment makers reported weak early 2019 numbers.
GE Stock Could Pop Sometime in the Future
There is a pathway for GE stock to head way higher.
Let’s look at the company’s Aviation business, which is growing at a healthy rate, operates in a stable sector,, and has solid, stable profit margins. Last year, the Aviation business produced about $6.5 billion of profits before interest and taxes. Assuming $2 billion in interest expense and a 20% tax rate, that implies a standalone GE Aviation business could generate about $3.6 billion in net profits. Competitor Boeing (NYSE:BA) normally trades around 20 times analysts’ average forward earnings estimate. Based on that multiple, GE’s Aviation business alone could be worth more than $70 billion.
GE stock has a market cap of $80 billion today.
Thus, if GE successfully lowers its debt load, reduces its interest payments, and boosts the profitability of its core businesses, “new GE” could be worth substantially more than $80 billion.
But, in order to believe in that scenario, you have to believe that GE can and will reduce its debt load and boost its core profitability. At this point in time, there’s no reason to believe that will happen anytime soon.
So while GE stock could eventually rally tremendously, it won’t pop anytime soon.
The Bottom Line on GE Stock
The big turnaround of GE has already come and gone. Right now, lack of clarity is once again the theme dominating the outlook of the company. As long as this remains true – and it looks poised to remain the case for the foreseeable future – General Electric stock will be stuck in neutral.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
