General Electric (NYSE:GE) shares are on the move after surging 10% on Sept. 16 and clearing some major areas on the chart. That spurt doesn’t make GE stock a buy, unfortunately.
This stock simply has too many problems to be considered a serious long. While it may be susceptible to the occasional squeeze higher, that is not a sound investment thesis.
For traders, they may find value in that type of action. As investors, it only adds to the unpredictability of this name. With some concrete changes in its businesses, GE stock could be one heck of a value play — eventually.
As of now though, there are simply too many headwinds and the stock — despite its recent rally — has been too much of a laggard to take seriously.
Don’t be starstruck by the stock’s 10% jump, even if it came on a volatile Fed day decline. Just this week, GE stock was testing into its March lows. Yes, its March lows! While the rest of the market has moved on from its novel coronavirus lows, GE was about flat up until Sept. 16.
That tells you about everything you need to know. This will tell you the rest.
Breaking Down GE Stock
General Electric has been stuck in a major rut for years now. Poor management, a bloated balance sheet and horribly timed M&A have saddled this company with too much weight.
After a few management changes, CEO Larry Culp took over the helm. Let’s give credit where credit is due: Culp has been doing a good job with GE. He’s working to get the company back to positive free cash flow and reduce debt. GE needs to slim down, become more nimble, double down on its strongest businesses and rebuild from the inside out.
Culp was making solid progress, but then Covid-19 came along. Truth be told, there’s only so much someone like Culp can do.
In the most recent earnings report, four of GE’s five business segments reported a loss. That’s up from three of its five businesses in the prior quarter. In that quarter, the company suffered worse-than-expected cash outflow. Industrial free cash flow came in at a $2.21 billion deficit. Last quarter, that figure barely shrank to $2.1 billion.
In what was once its strongest business unit, Aviation has now suffered greatly. Part of that is due to Covid-19, part of it’s due to specific issues related to certain planes (which admittedly, is not GE’s fault). In any regard, this unit reported a loss of nearly $700 million last quarter. Orders fell 35% and revenues dropped 29%.
Healthcare was the company’s one bright spot last quarter, if we can call it that. While this united reported profit of $550 million on $3.83 billion in revenue, these figures were down 43% and 21% year-over-year, respectively.
Perhaps GE’s business is near a trough, but what if it’s not?
Bottom Line on General Electric
The industrial sector is a tough space to be in right now. End customers are struggling and orders are in disarray. Despite the stock market making it feel like everything is fine, the global economy still has real underlying issues.
Even though GE is struggling right now (which is to be expected), doesn’t mean it will be struggling forever. However, as investors we need some kind of catalyst aside from, “hopefully things will be better at some undefined point in the future.”
With GE stock, there is none.
The financials are unattractive. The once-powerful dividend is just a penny per share per quarter, good for a yield of about 0.45%. Estimates are not kind, either.
Analysts expect a 17% decline in sales this year and just a 3.8% rebound next year. Earnings are forecast to grow substantially next year, climbing from an expectation for a loss of 4 cents per share this year to a profit of 35 cents per share next year. However, if it all comes to fruition, 2021 earnings will represent a near 50% decline from 2019’s earnings result.
The technicals have been better lately, pushing through the 50-day and 20-day moving averages. However, the rally seems like a better opportunity to exit existing longs than it is to initiate a new position.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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.