General Electric, which is in the early stages of what figures to be a multiyear restructuring, has seen its shares lose more than half of their value over the past three years, and it was recently the target of a short-seller who called the company a bigger fraud than Enron.
Boeing shares by comparison have held up well, trailing the S&P 500 by less than two percentage points year to date, despite two fatal crashes involving its next-generation 737 MAX commercial plane that have led to questions about Boeing's program management skills as well as a series of other high-profile flubs involving other programs.
If you look beyond their individual troubles, both General Electric and Boeing have substantial businesses with the potential to generate strong returns over the long haul. So, does that make either company a buy? Here's a look at where things stand for both GE and Boeing to try to determine which, if either, is a better buy right now.
GE: Not fraud, but it is ugly
General Electric is far removed from its Jack Welch-engineered glory days, humbled by ballooning debts and misguided acquisitions during the tenure of Welch's successor, Jeff Immelt. The company's balance sheet, heavy on financials and insurance, came under pressure during the financial crisis, and market-topping energy acquisitions added to the stress.
Immelt was removed in August 2017 when GE hired John L. Flannery, who was jettisoned 14 months later in favor of Larry Culp. Culp has cut aggressively since taking over and used divestitures to raise cash, striking a deal to sell GE's biopharma business to Danaher, his former employer, for $21 billion, and completing the merger of GE's transportation division with Wabtec.
Results have stabilized, but criticism remains. In August, Bernie Madoff whistleblower Harry Markopolos issued a report detailing various losses, writedowns, and scandals that have haunted GE and claiming the company is vastly overstating its earnings and undercounting insurance reserves. GE shares plunged more than 20% in August as a result.
I believe Markopolos greatly overstated his case, and GE, though far from restructured, remains a viable business. Culp, for what it's worth, responded to the drop by buying more than 250,000 shares after their fall, a move designed to show investors he remains confident in the turnaround.
Culp's plan is to rebuild GE around a handful of businesses that have the potential to be strong performers. Leading the way is aviation, including GE's massive aircraft engine business, which posted a profit margin of 21.2% in 2018 and has a strong order book that should be reliably profitable for years to come.
Healthcare is another bright spot, even after GE sold part of that business to Danaher. GE is retaining about 85% of its $20 billion in healthcare sales and will have strong exposure to the hospital and lab equipment markets.
Finally, energy today is part of the problem, and GE must sort through pension issues, unprofitable contracts, and liabilities related to past M&A. But there is a market for GE's products for power plants and alternative energy generation, and the business should be a winner once the restructuring is complete.
Boeing: Flying through turbulence
Boeing headlines this year have been dominated by the 737 MAX, which remains grounded following a March incident in which an Ethiopian Airlines flight crashed, killing all 157 people on board. It was the second fatal crash for the new plane in a matter of months, and it started a process of discovery that has at times portrayed the aerospace giant in a negative light.
Boeing has come under regulatory scrutiny for the processes that led up to the 737 MAX getting certified, and the costs are mounting. The company has had to negotiate support deals with key suppliers to avoid liquidity issues in the supply chain. And the grounding has caused chaos at Boeing's Renton, Wash., facility where the plane is made, as the company has been forced to store some planes in the employee parking lot.
Historical moment in Aviation history! ✈️— Aviation photo ✈ (@Airplane_pic) June 23, 2019
Aerial images show the Boeing 737 MAX aircraft parked in the staff car park because there is no more capacity left at the airport. pic.twitter.com/TZ3MKH8rdM
As many as 500 737 MAX planes are being stored around the globe at an estimated cost of about $2,000 per month per plane. There will be added expense once the grounding is complete as planes out of service for such a long period of time require thorough, and time-consuming, inspections. It seems likely Boeing will have to foot that bill for its customers in addition to potentially paying some of the estimated $1 billion to $1.5 billion in airline expenses resulting from cancelled flights.
That's far from the only headache Boeing is dealing with. The company's Air Force tanker is years behind schedule and has cost Boeing more than $3 billion in out-of-pocket expenses. Deliveries have begun, but the Air Force initially had to ground the fleet due to debris left over from the manufacturing process. More recently, it was forced to temporarily bar the planes from carrying cargo or passengers because of a new defect.
Meanwhile the 777X, Boeing's highly anticipated new long-haul commercial aircraft, recently failed a safety test after a part of the fuselage depressurized.
Through it all, Boeing's share price has held up fairly well: up for the year and just barely trailing the S&P 500. The company is an aerospace and defense giant with $100 billion in sales, a number of lucrative franchises, and some intriguing tech, and investors are likely correct in not panicking and instead assuming that eventually, all of the kinks will be worked out. Still, given the number of issues Boeing has experienced, it does require a leap of faith to make that assumption.
And the better buy is...
I don't think either General Electric of Boeing is in danger of collapse, and I would predict that shares of both companies will trade higher in five years than they do today. But given the number of compelling buys in the defense and industrials sectors that don't have the same headline risks these companies currently have, I wouldn't recommend buying either right now.
If forced to choose, I'd buy into GE before Boeing. As mentioned above, despite Boeing's issues, the stock has hardly declined and is far from a bargain. Boeing's stock trades at an earnings multiple that's more than twice that of most large defense companies, and its price-to-sales ratio is a pretty expensive 2.3. GE, by comparison, currently doesn't have positive net income to produce a meaningful earnings multiple, but it trades at less than 0.7 times sales.
GE comes with more risk than Boeing, but the collection of assets housed within the portfolio is formidable. Culp proved himself to be a strong leader at Danaher and has made a good impression in his first few months at GE. In a crisis situation, quality management matters, and for my money, GE has the stronger team.
I'm not rushing into either stock, but I am at least keeping an eye on how the restructuring of General Electric progresses.