After earnings on Wednesday morning, General Electric (NYSE:GE) stock fell 4.3%. Some investors might be tempted to see the decline as a short-term response to results pressured by the novel coronavirus pandemic.
After all, an adjusted loss of 15 cents per share did miss Wall Street expectations by a nickel. But it’s unlikely investors cared all that much. Analyst estimates in this unprecedented time are fuzzy at best. GE’s revenue actually topped consensus.
Meanwhile, elsewhere in the market, investors have taken the long view. This simply isn’t a market where a “miss” means a stock goes down, and a “beat” means it goes up. Indeed, GE’s industrial rival Honeywell (NYSE:HON) saw its stock slip last week despite handily topping estimates.
Rather, the issue with GE earnings report seems to be rather simple: it provided another reminder of the long road ahead for the company. Pandemic or no pandemic, this is a company still playing defense, not offense. And there was little, if any evidence, in the Q2 report or management commentary to suggest that will change.
To be fair to management, I’m not sure General Electric has much choice. But that’s exactly the point. Even in a best-case scenario, a GE turnaround will take years. On Wednesday, the company didn’t give much reason for investors to wait that long.
Unsurprisingly, GE’s numbers for Q2 were ugly. Revenue dropped 24%, and 20% in the industrial business (i.e., excluding GE Capital).
Order numbers were even worse. On a consolidated basis, the figure fell 38% year-over-year. The weakness was across the board. GE Power was down 42% and Renewable Energy 19%. Aviation, thanks in part to issues at key customer Boeing (NYSE:BA) and a plunge in miles flown, saw a 56% decline.
Even Healthcare was off 18%, as some help from Covid-19 products was more than offset by a significant reduction in elective procedures.
Again, there’s not much of a surprise here. And there’s not all that much that GE could have done in Q2.
In terms of what the company could control, the news perhaps isn’t that bad. The company only burned $2.1 billion in cash in the quarter, which was better than feared. Debt continues to come down, with a $9.1 billion reduction so far in 2020. Cost-cutting continues apace.
GE stock in fact opened 1.5% higher. But the gains quickly faded as investors digested the report.
That Isn’t the Problem
It’s worth looking at GE’s highlights from the Q2 earnings release. Again, these are the positive attributes of the quarter that GE chose to call out.
To be fair, the pressure on the numbers from the pandemic left few bright spots in the report. But I’m skeptical the tenor would have been all that different even in a normalized environment.
GE’s first bullet point notes that the company “supported global customers and communities combatting COVID-19”. GE manufactured respirators and facemasks, while also ramping manufacturing of needed X-ray and ultrasound machines.
The efforts no doubt were welcomed by hospitals and first responders. But even in GE Healthcare, they didn’t move the financial needle.
From there, it gets much more bleak. GE made it more than one-third of the way to cost-cutting and cash savings targets. It refinanced debt to push out maturities of over $10 billion in debt. It cut that debt by $9 billion — but mostly through the sale of GE Biopharma to Danaher (NYSE:DHR), Culp’s former employer. The business itself isn’t generating enough free cash flow to deleverage (and this is a problem that long predates the pandemic).
GE is selling off the rest of its stake in Baker Hughes (NYSE:BKR). But it is doing so at a time when BKR, ignoring the worst of the March selloff, trades at multi-decade lows.
It sold GE Lighting in the quarter — for just $250 million, according to reports. GE stock still has a market capitalization just shy of $60 billion.
Only the hiring of several new executives is a sign of the company being aggressive.
Where GE Stock Goes From Here
What those highlights, well, highlight is the same problem I called out after the Q1 release. GE’s strategy, for years now, has simply been to shrink.
Its workforce has shrunk. GE Capital has shrunk. GE’s reach has shrunk, thanks to the divestitures of Lighting, Appliances, Biopharma and Oil and Gas. (Oil and Gas was merged into Baker Hughes in 2017.)
That creates two problems. First, the strategy needs to change, but it’s not clear how. Aviation is facing years of pressure. Power has been a mess for some time, and secular shifts in the energy industry suggest weaker demand, even once normalcy returns. It’s basically Healthcare or bust for GE — and the company even reportedly considered spinning that business off before the Danaher/Biopharma deal.
Second, there’s not much more shrinking left to do. It’s hard to believe there are more significant cost cuts to be found. It’s similarly hard to imagine any buyer paying a real price for Power or Aviation (or the wisdom of GE selling either near the bottom).
And if GE can’t start generating material free cash flow, balance sheet problems aren’t going anywhere.
These problems have been around for years. Investors hoped Culp could fix them. But quarter after quarter, Culp, as talented an executive as he is, can’t find a way to inspire confidence.
That increasingly leads to one conclusion: the problem isn’t management, but GE itself. Earnings did nothing to contradict that conclusion. And that is likely why GE stock fell on Wednesday, and why it will have a hard time finding a rally soon, if ever.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.