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12th May 2022

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GE LEAP engine

General Electric‘s (GE) turnaround is gaining traction as key businesses improve while the industrial giant continues to shrink its debt load. Is GE stock a buy right now?




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First-quarter earnings are due April 27, and analysts expect EPS to drop 60% to 2 cents as revenue slides 14.4% to $17.58 billion amid ongoing restructuring efforts.

Investors will also look to key metrics like industrial cash flow and any updates on the dividend.

GE Stock Technical Analysis

Shares are consolidating with a 13.93 handle buy point. GE stock is 8% below the entry and is testing support at the 50-day line, according to MarketSmith chart analysis.

The relative strength line for GE stock is lackluster. It rallied for most of 2020 but shows a longer-term downtrend. A rising RS line means a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.

General Electric has more than doubled from the May 2020 low of 5.48, which came as the pandemic crushed air travel and the market for jet engines.

At an investor event March 10, GE announced a $30 billion deal merging its aircraft-leasing unit with AerCap (AER), with proceeds used to lower debt. General Electric also said it’s shrinking GE Capital further and announced a 1-for-8 reverse stock split.

Initially, GE stock sold off on the news. But after Wall Street generally defended the jet-leasing deal, it rallied.

“We have greater confidence in General Electric’s path to recovery, and the company’s deleveraging efforts have progressed further than we initially expected,” Morningstar analyst Joshua Aguilar wrote April 1.

The industrial giant earns a poor IBD Composite Rating of 44 out of 99. The rating combines key technical and fundamental metrics in a single score.

General Electric owns an RS Rating of 85, meaning it has outperformed 85% of all stocks over the past year. The Accumulation/Distribution Rating is a B-, on a scale of A+ to a worst E. It’s a sign of roughly equal institutional buying and selling of GE shares over the past 13 weeks.

GE remains a popular stock with strong institutional support. As of March, 1,853 funds owned shares. GE stock shows two quarters of rising fund ownership, according to the IBD Stock Checkup tool.


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GE Earnings And Fundamental Analysis

On key earnings and sales metrics, GE stock earns an EPS Rating of 15 out of 99, and an SMR Rating of D, on a scale of A+ (best) to E (worst). The EPS Rating compares a company’s earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.

Sales fell in recent times, due to various factors including asset sales. In recent years, GE shed a biotech unit, its light bulb business, and a majority stake in its oil field services business.

GE LEAP engine. (testing/Shutterstock.com)

The AerCap jet-leasing deal, too, will make GE “a more focused, simpler, stronger company,” according to CEO Larry Culp.

On Jan. 26, the industrial giant posted a 62% EPS drop for the final quarter of 2020 as revenue sank 16%. But GE saw a surge in cash flow, which it tied to a big jump in orders in its power and renewable energy units, as well as operational efficiencies.

Lingering liquidity concerns have “likely been put to rest,” John Inch, an analyst at Gordon Haskett, said the same day.

Analysts forecast GE earnings will rebound to 24 cents per share in all of 2021, up from one cent a share in 2020. But that would still be below 2019 EPS of 61 cents. GE earnings are likely to more than double to 52 cents a share in 2022 as sales increase 7%, according to Zacks Investment Research.

For 2021, GE is targeting free cash flow (FCF) of $2.5 billion-$4.5 billion from industrial operations.

The FCF measure is closely watched as a sign of the health of GE’s operations and its ability to pay down debts. In 2020, GE generated $606 million in FCF, down 74%, but beating its own guidance. In fact, General Electric turned cash-positive a year ahead of schedule.

Five analysts on Wall Street rate GE stock a buy, five have a hold, and none has a sell, per Zacks.


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Headwinds For GE Aviation Lifted

The jet-engine business was once General Electric’s biggest driver of profits. But in 2020, GE Aviation, together with the jet-leasing unit, turned into the biggest drag on GE earnings.

The Boeing 737 Max and coronavirus crises battered the business on the commercial side. Its defense side fared better.

Boeing 737 MaxBoeing 737 Max. (Boeing)

GE Aviation makes jet engines for plane makers, such as Boeing (BA) and Airbus (EADSY). It also runs a lucrative aftermarket business for engine repair and maintenance. Plus, it leases aircraft to airline customers.

In 2020, GE’s commercial aviation business took a series of blows. Boeing halted production of the 737 Max jet for a few months after two fatal flights, pressuring Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. Engine shop visits slowed while leasing customers sought short-term deferrals. As a result, GE Aviation slashed jobs by 25% and later warned of more cuts.

Now airlines are returning the Boeing 737 Max to the skies, after the jet was cleared to fly late last year. And airlines are starting to order planes again, as the market continues to shift from wide-bodies to longer-range narrow-body aircraft.

Morningstar’s Aguilar expects GE to benefit from the shift to more profitable narrow bodies. “GE has more narrow bodies that are 10 years or younger than the rest of the industry, and 62% of its total fleet has seen one shop visit or less,” he wrote April 1.

The jet-leasing deal with Ireland’s AerCap marks the biggest splash so far in GE CEO Larry Culp’s turnaround campaign.

Proceeds from the deal should speed up turnaround efforts, allowing GE to cut debt by $30 billion and bring the total slashed since 2018 to $70 billion. It’s expected that General Electric will eventually get out of jet leasing altogether, though it’s taking a 46% stake in the combined company for now.


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Growing Momentum For GE Stock

CEO Culp’s top priority is improving General Electric’s financial position. His new deal to sell the jet-financing business furthers that goal, while allowing him to concentrate on GE’s industrial core, as a maker of jet engines, gas turbines, wind turbines and hospital equipment.

In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.

The coronavirus pandemic hit GE Aviation — once its “crown jewel” — hardest, with revenue down 33%, profits down 82% and orders down 41%. As 2020 progressed, GE saw a recovery in other business segments, with Q4 orders up 26% in power, up 34% in renewable energy, and up 1% in health care, minus the sale of a biopharma unit.

Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.

In late January, General Electric took a big step by reinstating financial guidance, as pandemic clouds cleared. In early March, GE backed 2021 targets for revenue growth in the low single digits, and as much as $4.5 billion in free cash flow. GE expects an aviation recovery in the second half of the year.

Other core businesses also aren’t out of the woods. For example, GE Power is stabilizing after a terrible slump in the market for coal- and gas turbines to generate electricity. But demand continues to shift to wind and solar energy, where GE has a nascent business.

Still, as GE’s financial condition improves, hopes for the dividend could follow. In December 2018, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, announced in November 2017 along with the broad restructuring, had halved the dividend to 12 cents.

The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends. GE stock’s current 4-cent annual payout offers a yield of 0.3%.


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Rivals To General Electric

Rivals to General Electric include Raytheon Technologies (RTX) and Siemens Energy.

Raytheon and Rolls-Royce of Britain are major jet-engine rivals. Siemens Energy competes with GE in power. It emerged in September after Siemens (SIEGY) spun off its low-margin gas turbine business. Japan’s Mitsubishi Hitachi is another big power rival.

General Electric and Siemens Energy are embroiled in a lawsuit, with the latter fighting claims of stealing trade secrets to rig bids.

The diversified operations group ranks No. 134 out of 197 industry groups tracked by IBD. It also includes 3M (MMM) and Honeywell (HON).


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Is GE Stock A Buy Now?

General Electric is making progress in its long, ambitious turnaround. GE earnings and cash flow are expected to further improve in 2021, with the Boeing 737 Max flying again and the expectation of a recovery in the broader economy.

Moreover, GE’s financial position continues to improve as it lowers debt and costs, while building liquidity. The jet-leasing deal with AerCap should further help GE’s balance sheet.

Many analysts on Wall Street are bullish about GE’s current leadership and improving fundamentals. But others remain on the sidelines. General Electric belongs to a badly lagging industry group.

From a technical perspective, GE stock has a new 13.93 buy point. It’s well below the entry and the base follows a multiyear decline.

Bottom line: GE stock is not a buy.

Over the long term, buying an index fund, such as SPDR S&P 500 (SPY), would have delivered safer, higher returns than GE stock. If you want to invest in a large-cap stock, IBD offers several strong ideas here.

To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.

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2021-04-20 18:47:28


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