Despite Improving Earnings, Investors Should Still Avoid General Electric

General Electric (NYSE:GE) has started to show signs of life. Shares have been rallying hard over the past month, clearing some key technical levels. Still, GE stock isn’t a high-quality name, and investors should focus on greener pastures instead.

The General Electric (GE) logo on a building

Source: Sundry Photography /

The company is a beleaguered industrial giant, with its best days in the rearview mirror. The issues we’re seeing in aerospace and the overall economy will continue to plague GE stock, regardless of whether it’s rallying.

Personally, I find it hard to see a reasonable argument that says this name should take out its 2020 highs. Those came in February when GE hit $13.25 before the novel coronavirus came to the U.S.

While management can continue to make progress and the stock may eventually hit that level, there seems to be no reason why it would get there in the short term.

Why I Remain Disinterested in GE Stock

When it comes to the stock market, we’re in the business of making money. Being right is a nice addition to that equation when it happens, but let’s be crystal clear: being right is not the priority.

General Electric can fix its problems over the long term. Truth be told, I hope it does. It’s just that when a company loses its footing like this, it’s not an asset that I gravitate toward. GE didn’t just get caught up in the coronavirus selloff. Cash-flow and balance-sheet issues buried the company long before Covid-19. Being a cyclical company, General Electric ebbs and flows with the economy.

Except in the last few years, GE has done anything but flow with the economy — the company makes it look like we’ve been in a deep recession for years. Throw in the impacts of Covid-19 and specific issues from a certain airline manufacturer, and GE stock doesn’t stand a chance.

The latest rally may result in a changing of the tide. However, it could also be a better sell than a buy once it runs out of steam. For now, I’m keeping my chips stacked on the companies that are proven winners and away from those like GE that are still trying to prove their worth.

Breaking Down General Electric

When GE reported earnings in June, it was a disaster. At least in my mind. Four of its five business units reported a loss (up from three in the prior quarter). Cash outflow of more than $2 billion was worse than expected, and its only bright spot — Healthcare — saw its income and revenue fall 43% and 21% year-over-year, respectively.

This quarter was much better, even though total orders sank 31% and revenue declined 17% year-over-year.

However, industrial free cash flow of $514 million was a big improvement from last quarter’s $2.21 billion outflow. Management expects that acceleration to continue, with industrial free cash flow of $2.5 billion in the fourth quarter and positive cash flow in 2021.

As GE Chairman and CEO Larry Culp said, “We remain focused on unlocking upside potential for the long term.”

Business improved as well in Q3, but GE isn’t out of the woods. Just two businesses showed year-over-year revenue growth. That was its Power and Renewable Energy units, but they grew just 3% and 2%, respectively, versus last year.

On the plus side, both units reported a profit this quarter, although profit margins were less than 3.7%. Aviation and Healthcare — GE’s two largest units — both reported a profit too, which is good. However, those profits were down 79% and 21% year-over-year, respectively.

And yet, business is improving. When you dig through the numbers, there’s no denying it. But just because a company is improving does not mean it’s healthy. It doesn’t mean it’s out of the woods.

Case in point, on a GAAP basis, GE still lost money in the most recent quarter.

Bottom Line on GE

I don’t know that GE stock will go on to retest its lows. It seems like that ship has sailed, and perhaps the outright bearish thesis is gone. That being said, this isn’t a black-and-white situation.

In other words, we don’t have to be outright bearish or outright bullish. One can be neutral toward GE. Maybe shares rally into the $10-to-$12 range. Perhaps the stock settles into the $7-to-$8 area.

With the aviation industry improving — but still hurting — and the economy perhaps taking another dip due to rising coronavirus cases, GE is just not where I want to park my money right now.

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.

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