General Electric (NYSE:GE) or Coca-Cola (NYSE:KO)? Let's take a look at which of these two iconic companies is looking more attractive right now on a risk/reward basis and why. While both companies are worth avoiding if we hit a recession, the outlook in the aftermath of a containment of the novel coronavirus is arguably much clearer for one of these two companies. Here's the lowdown.
How COVID-19 is hurting corporate earnings
The world is watching the data on daily new cases of COVID-19 with a view to judging the appropriate response necessary to contain the outbreak. In turn, the responses by governments across the globe -- shutting down travel, extensive border controls, production shutdowns, closing public areas, etc. -- are having a significant impact on corporate revenue and earnings prospects.
As such, the impact on corporate earnings is something that could arguably be judged on a day-to-day basis. The rapid deterioration in equity markets in February and March is probably in large part due to the data telling people that the novel coronavirus impact isn't just going to be a first-quarter impact.
For an indication of the impact on Coca-Cola, here's a look at what the company said in a press release dated Feb. 21: "The company currently estimates an approximate 2- to 3-point impact to unit case volume, 1- to 2-point impact to organic revenue and 1- to 2-penny impact to earnings per share for the first quarter. Based on its latest forecasts, the company still expects to achieve its previously provided full-year guidance."
Clearly, this press release was distributed before it became clear that COVID-19 would internationalize in the manner that it has, and it's hard to think that the company won't have to lower full-year guidance following recent events. Nevertheless, a $0.01-$0.02 reduction in earnings per share (EPS) for the first quarter (largely due to China) is not a bad result in the context of the analyst consensus for full-year EPS of $2.25. The impact of the coronavirus will obviously be larger following its internationalization, but if the indication from the China impact is a guide, then Coca-Cola is one of those companies that could escape relatively unscathed.
General Electric's perfect storm
Unfortunately, the same cannot be said about GE, and the company is facing a few significant headwinds thanks to the novel coronavirus.
- The travel ban and consequent slump in passenger traffic will hurt engine sales and also spare parts demand, at a time when the Boeing 737 MAX still hasn't returned to service.
- GE Capital is also set to suffer, as its most valuable asset is jet engine leasing business GE Capital Aviation Services, or GECAS.
- GE also faces less obvious headwinds such as an increase in its pension deficit, as a consequence of the interest rate cuts made in response to the crisis, and a reduction in the value of its remaining stake in Baker Hughes, as a consequence of the crash in the price of oil.
By far the most important impact will be seen at GE Aviation. It's particularly concerning, as it's a company that GE is relying on to carry the business forward in 2020, particularly as power remains weak and healthcare's growth has been disappointing in recent quarters.
GE's guidance challenges
In common with Coca-Cola, GE's management has already tried to quantify the impact from coronavirus in the first quarter. For example, at the company's outlook meeting at the start of March, CEO Larry Culp said there would be a $300 million to $500 million hit to free cash flow in the first quarter, but he maintained the full-year guidance for $2 billion to $4 billion in free cash flow.
However, the full-year guidance doesn't include any impact from the coronavirus beyond the first quarter, and given that the International Air Transport Association has been lowering its estimates for airline revenue and passenger travel in 2020 as the crisis has worsened, it's fair to assume that GE's earnings outlook is dimming.
Coca-Cola or GE?
All told, there's a huge amount of uncertainty around GE's near-term prospects, and until it becomes clear that the outbreak is being contained there's downside risk in every stock with aerospace exposure.
However, the problem is no one really knows when conditions will normalize, and there is a heightened degree of uncertainty around the breadth and depth of the impact on corporate earnings.
GE certainly offers more upside potential given a swift resolution to the crisis, but until then only aggressive risk-seeking investors would favor GE over Coca-Cola.