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Better Buy: General Electric vs. General Motors

By Reuben Gregg Brewer – Updated Apr 12, 2019 at 9:42PM

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These two American icons have storied histories -- but is one of them a better investment today?

General Electric Company (GE 0.19%) and General Motors Company (GM -0.94%) are known the world over. However, each has been facing some headwinds lately. Investors looking to add these American icons to their portfolios should probably err on the side of caution, which has a big impact on the selection process here.

The fall from grace

General Electric's stock is down over 60% over the last three years. That decline, however, is just the tip of the iceberg. The stock hasn't been this low since the deep 2007-to-2009 recession, when there were legitimate concerns that GE wouldn't make it out of that recession in one piece. Worse, the current troubles still have their roots in the ones that caused so much concern roughly a decade ago.

A woman drawing a risk-versus-reward chart

Image source: Getty Images.

GE, under the guidance of CEO Jack Welch, let its finance arm grow disproportionately large and allowed it to stray too far away from its core purpose (supporting the sales of the company's products and services). When the recession hit, the industrial giant was forced to cut its dividend, sell assets, take huge one-time charges, and accept a government handout. That all happened under Welch's successor Jeffrey Immelt.

Immelt appeared to get GE moving in a better direction, refocusing on its industrial business and shifting away from finance. However, he made a couple of large acquisitions that didn't pan out as planned, and was eventually replaced by insider John Flannery. The new CEO had the displeasure of announcing that GE wasn't doing as well investors had been led to believe, and that the company would take write-offs, sell assets, and cut its dividend. The finance arm, though much smaller than it had been, continued to be a problem.

Flannery, however, wasn't working fast enough to right the ship and was replaced by the board after about a year. The new CEO, outsider Lawrence Culp, is a highly respected industry veteran who achieved notable success at the head of Danaher. Like Flannery, Culp announced that GE was facing bigger headwinds than investors may have realized. He also announced one-time charges, asset sales, and a dividend cut, with legacy issues related to the finance arm continuing to be a thorn in the company's side.

GE Chart

GE data by YCharts

GE is, at this point, a turnaround play with a highly leveraged balance sheet. And what the company looks like in the future will be vastly different from what it looks like today. Moreover, with such a long and drawn-out struggle to get the company back on the right track, it's really operating from a position of weakness. In fact, some of its recent moves have been viewed by industry watchers as bordering on desperate, including raiding crown jewels -- like the planned spin-off of its healthcare division, among other actions. (Note that the company recently agreed to sell a portion of its healthcare business to Danaher.)

Although there's massive recovery potential here, with some industry watchers believing that GE is close to fixing its biggest financial problems, most investors would be better off avoiding GE until it shows much more progress on its current turnaround plan. It's just too soon to tell what GE will look like on the other side of what has now become a fast-paced restructuring effort. But don't run off and buy GM just yet, either.

Preparing a cyclical business

Compared to GE, General Motors looks like a paragon of health today. That said, investors shouldn't forget that GM was forced into bankruptcy during the 2007-to-2009 recession. There were many reasons for that unfortunate outcome, including a heavy debt load, but one key issue was that the company's auto business is highly cyclical. While there doesn't appear to be a huge risk of insolvency for GM today, people still tend to buy fewer cars when the economy hits a soft patch.

And that's an issue to watch closely, though GM is taking steps to ensure it can continue to invest for the future even if car sales continue to slow. Note the word continue there; GM's sales were down 1.6% in 2018. Although that wasn't as bad as some of its peers, it's clearly not an ideal backdrop given that the current economic upturn is among the longest in history. Worse, there are notable economic risks in the market, including a trade spat with China, a plunge in Chinese auto sales (China is a key market for GM), and slowing economic growth in Europe. 

GM Chart

GM data by YCharts

If the economy falls into recession, GM's business would likely suffer, and investors would react by pushing the stock lower. However, as noted, GM isn't just waiting around for the next downturn. It has been shifting toward in-demand vehicles (trucks and SUVs) with higher profit margins, as well as closing production facilities that it doesn't need. The goal is to reduce costs by as much as $4.5 billion to free up as much cash as possible to invest in its shift toward electric vehicles, including a self-driving electric taxi service. And GM is doing all of this while economic times are strong so it doesn't have to worry as much when the cycle inevitably turns

For most investors, General Motors is a much better option than GE since it is working from a position of strength (despite the sales drop, GM still earned $6.54 per share in 2018). However, that has to be taken with a grain of salt. The automaker is still preparing for a downturn, which will likely lead to a lower share price. So the company's own actions, despite the positive nature, hint that now isn't the right time to buy GM. There could soon be a better opportunity if management's outlook, which drives its current business plans, proves accurate.

Take a pass for now

GE's outlook is highly uncertain. Only aggressive investors looking for a turnaround situation should be interested today. Most should wait for concrete evidence that new management has gotten the company back on track. GM is in much better shape, but is preparing for a recession that will likely lead the cyclical stock to lose value. Being pre-emptive is great, but if the company's actions prove prescient, the stock will likely fall anyway -- and open up a better buying opportunity. In other words, GM isn't a great option, either, even though management appears to be making the right moves.

Check out the latest GE and GM earnings call transcripts.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$64.47 (0.19%) $0.12
General Motors Company Stock Quote
General Motors Company
$34.71 (-0.94%) $0.33

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