Shares of industrial conglomerate General Electric (NYSE:GE) continue to drop amid rapidly growing pessimism on Wall Street. It all started with what many close observers viewed as a horrible double miss third-quarter earnings report. Those poor numbers pushed the analyst community deeper into bear territory. Moody’s downgraded GE’s credit rating to just three notches above “junk” territory. Gordon Haskett said GE stock could fall all the way to $5. J.P. Morgan wasn’t much more bullish, cutting their price target to $6.
All in all, mostly thanks to deteriorating fundamentals, GE stock simply refuses to find a bottom. Two years ago, this was a $30 stock. Today, it is a $9 stock, and rapidly falling.
Some investors are tempted to buy the dip. After all, this is still a really powerful company with wide-sweeping global influence and a few businesses in Aviation and Healthcare that are quite attractive. With the company’s market cap now closing in on $70 billion, versus $320 billion three years ago, the “buy the dip” thesis in GE stock does look pretty compelling.
But, not here, and not now. The present situation at GE is too unclear, too messy, and lacks sufficient growth catalysts to warrant buying the dip. As such, the smart move with GE stock remains to stay away.
Long-Term Upside Is Fairly Compelling
The long-term bull thesis for GE stock is quite compelling at current levels, supported by the idea that GE still operates very healthy Aviation and Healthcare businesses which have long-term staying power and growth potential.
Annualized, last quarter’s segment profits from GE Aviation, Healthcare, and Transportation alone summed to about $10.8 billion. Taking out $2 billion for interest expense and 20% for taxes, that should flow into normalized net profits of roughly $7 billion. A market-average 16 forward multiple on that implies a market cap of over $100 billion.
GE’s market cap is presently closing in on $70 billion.
Thus, if you ignore all the messy parts about GE like the Power business, the bull thesis for GE stock to rally ~40% from current levels is convincing. But, at the present moment, you can’t just ignore those messy parts. They are still around, and they are still drags on the whole operating business.
Until those businesses are either divested or improve, GE stock will have a tough time bouncing back.
Near-to-Medium-Term Risks Are High
Not only will GE stock have a tough time bouncing back here, but the stock could also keep falling.
Consider the following. The DOJ and SEC are both probing GE regarding accounting standards. There’s about $115 billion in debt on the balance sheet, and free cash flow to service that debt is negative year-to-date. Industrial profits were down 5% last quarter, with segment profits down 21%, both worse than their year-to-date trends of up 2% and down 14%, respectively. Profit margins shrunk by 180 basis points last quarter, also worse than its year-to-date trend. The quarterly dividend was recently cut from $0.12 to $0.01 per share. And, GE stock still trades north of 11X forward earnings.
In other words, there’s a lot of noise surrounding GE, growth trends are deteriorating, the dividend is essentially non-existent, the balance sheet is a mess and the stock still isn’t incredibly cheap considering all the headwinds.
Given those fundamentals, it is tough to see GE stock rising. But, it isn’t that hard to see the stock continuing to drop. Sentiment is poor. Analyst support is weakening. Growth trends are worsening. Profit margins are falling.
Altogether, there’s just no reason to buy the dip in GE stock just yet. Until growth trends stabilize and the financials materially improve, the upside thesis lacks firepower and clarity. So long as that remains true, the downtrend in GE stock will persist.
Bottom Line on GE Stock
GE bulls will tell you to be greedy when others are fearful. But, they’ve also been saying that for the past year, while GE stock has dropped from $20 to $9.
In other words, the crowd seems to have it right on this one. There are reasons to be fearful with GE stock at the present moment. There will be a time to become greedy. But, that time is not now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.