Why the Good Times May Be Over for General Electric Stock

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Back in December, General Electric (NYSE:GE) stock looked to be in a dire situation. There was even buzz that the company could go bankrupt. But of course, the fears proved to be overblown. General Electric stock staged an impressive rally, going from $6.74 to $9.90.

General Electric Stock ge stock

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It’s true that GE stock is still far away from the $30 it reached back in 2016. Along the way, the company slashed its dividend to 4 cents per share and GE stock was booted from the prestigious Dow Jones Industrial Average. There was also the sudden departure of two of its CEOs.

But as of now, it does appear that General Electric stock has stabilized. In fact, since January the shares have been in a relatively tight range of $9.50 to $10 and change.

So far, GE’s new CEO, Larry Culp, has made the right strategic moves. Then again, he has an impeccable resume as a CEO. While at the helm of Danaher (NYSE:DHR), he posted standout returns for shareholders. He showed a knack not only for striking M&A deals at the right time, but also for ensuring that the company’s  core businesses remained disciplined and focused.

So could General Electric stock break out soon? Will Culp’s magic continue? Well, unfortunately, I think the current price of GE stock is more of a resistance level.

After all, GE is facing three major headwinds. Perhaps the most serious is the weakness of the company’s Power business, which represents about a fifth of its total revenues. The turbine business is fiercely competitive and is facing demand pressures. Another problem is the continuing difficulties stemming from the company’s ill-fated acquisition of France’s Alstom SA in 2015. GE has been cutting Power’s costs, but the unit will probably have to undergo more intensive restructuring going forward.

JP Morgan analyst Stephen Tusa put out a stinging report on the Power unit, writing: “We see nothing here to change our negative view on Power, more so evidence of a company that appears to manage to headlines rather than on-the-ground fundamentals.”

Ouch! And he also has a price target of $5 on GE stock.

In the meantime, GE Capital continues to weigh on General Electric stock. Unlike other financial institutions like JP Morgan, Citigroup (NYSE:C) and Bank of America (NYSE:BAC) that made major changes after the financial crisis, this division has not been proactive. One of its big issues is its outstanding debt, which stood at $66 billion as of the end of 2018.

Finally, there are some nagging wild cards facing GE stock. For example, what if the U.S. economy goes into recession? That would definitely make the turnaround of the Power business and GE Capital much more challenging.

Then there is the impact from Boeing’s (NYSE:BA) 737 Max grounded fleet, which uses GE’s engines and leasing services. When GE released its first-quarter earnings report, the company said that the Max issue posed a “new risk” to its 2019 earnings.

The Bottom Line on GE Stock

When it comes to fixing complex businesses like Power and GE Capital, the owners of GE stock will need to be very patient. That is why Culp has indicated that 2019 will be a “reset year.” In other words, it’s a good bet that there will not be many positive catalysts for General Electric stock this year.

Besides, the valuation of GE stock is already pricey, with its forward price-earnings multiple at 24.   That’s not far from what Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) are trading at.

In light of all this, there is really no urgency to buy GE stock for now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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