In past articles on General Electric (NYSE:GE), I’ve been bearish on the company’s near-term prospects. Granted, they’ve made some smart moves, like hiring former Danaher (NYSE:DHR) CEO Larry Culp in 2018. But that alone may not be enough to help GE stock weather current headwinds.
And I’m not just talking about the novel coronavirus. Even before the outbreak first hit the globe, General Electric was having to put out a lot of fires. Consider the headwinds surrounding GE Aviation and the Boeing (NYSE:BA) 737 Max grounding. Or, the continued losses at GE Power. And lest we forget the potential financial landmines inside GE Capital?
Nevertheless, GE stock has taken quite a hit since early March. Shares have fallen more than 40% since then. And while other stocks have rebounded from their mid-March lows, the company’s shares haven’t seen an equivalent rebound.
In other words, General Electric’s share price may now better reflect its current risks. But that’s not to say I want to jump into it right now. The pandemic added more to Mr. Culp’s plate. I am confident in his abilities to mount a turnaround. But it isn’t going to happen a quarter, or even two quarters from now.
With a rebound a work-in-progress, there’s plenty of time to jump into GE stock. With the company still weathering the storm, a “wait-and-see” approach may be warranted.
Expect Turnaround to Take a While for GE
Past issues with General Electric continue. The pandemic has just made them much larger problems. Take GE Aviation, for example. The 737 Max incident meant tougher times for the company’s crown jewel. Add in what has basically been a grounding for most air travel, and expect more issues in the near-term.
How about the other units? Improvements in GE Power, GE Capital and GE Healthcare could help move the needle. But the lion’s share of attention belongs to the aviation unit. How this business performs in the next few years could make or break GE stock.
Emphasis on “next few years.” Current aviation issues won’t just disappear once the pandemic ends. As UBS’s Markus Mittermaier recently said in a research note, commercial air travel demand may not return to 2019 levels until 2024.
Yet, Bank of America analyst Andrew Obin has a more optimistic take. He concedes it’s a long road to rebound for new plane orders. But the aviation aftermarket (parts-and-service) — GE Aviation’s profit center — should rebound much more quickly.
In short, things remain a mixed bag. Going into upcoming earnings and guidance updates, I wouldn’t be too confident we are about to turn a corner.
How About Earnings?
General Electric next announces earnings on April 29. According to Yahoo! Finance, the 16 analysts covering the stock give earnings estimates for the First Quarter 2020 (ending March 31) of between 5 cents and 15 cents per share, with the average being 8 cents per share.
Obviously, investors anticipate a sharp decline from the prior year’s quarter (Q1 2019 earnings of 12 cents per share). But, what happens if earnings fall at the low-end of estimates? Or worse? Remember Wall Street doesn’t have a lot of love for GE stock. Worse-than-expected earnings, or more bearish guidance from the company, could send the stock lower.
But what if news is better-than-anticipated? Won’t shares see a boost?
In my view, bad news sending shares to $5 per share is more likely than good news sending it to $10 per share. With this in mind, it doesn’t make sense to go all-in on General Electric right now.
Also, other potential risks remain on the table. If they come to fruition, expect shares to fall further. I’m talking about the company’s underfunded pension and long-term care liabilities. This just adds another layer of uncertainty for investors to handicap.
That being said, this isn’t a great stock to short. It’s too late to chase that opportunity. So, what’s the most likely trajectory? GE stock will likely trade on the sidelines over the next few quarters. Bad news will send it down a little bit lower. But crumbs of good news will boost it back up. Either way, the stock stays in single-digits for quite some time.
The Bottom Line on GE Stock
At just above $6 per share, General Electric does offer high potential returns relative to risk. But don’t get fearful of missing out here and buy shares as soon as possible. It’s going to take time for the company to put out its many fires. Even if the issues with GE Aviation are less bad than predicted, other ticking time bombs like long-term care and pension liabilities could come back to haunt the company.
However, GE stock is no short-candidate. There’s still a chance shares boost back to $10 on the heels of good news. This possibility just isn’t enough to warrant a buy ahead of earnings.
Sitting on the fence, I see a “wait-and-see” approach as being the safest way to play this fallen stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.
