Shares of underperforming manufacturer General Electric (GE -2.46%) are flirting with 25-year lows. Over the past three years, the stock has lost about 75% of its value. Over that same period, the company has shed two CEOs, two CFOs, numerous business lines, and plenty of investor trust.
Value investors may be wondering if it's a good time to pick up shares of this beaten-down company, but three recent developments -- ones that seem pretty innocuous -- contain hidden warnings. Here are three reasons why GE's share price may be anything but a bargain.
Image source: Getty Images.
1. Worsening short-term outlook
On April 9, General Electric withdrew its 2020 guidance, stating that Q1 adjusted per-share earnings were likely to come in "materially below" the company's initial forecast of $0.10 per share. Similarly, GE also canceled its full-year guidance: "Given the evolving nature of the COVID-19 pandemic, at this time, GE cannot forecast with reasonable accuracy the full duration, magnitude, and pace of recovery across our end markets, operations, and supply chains. Therefore, the Company believes it is prudent to withdraw guidance for 2020."
The withdrawn guidance isn't particularly surprising: COVID-19 has had a profound effect on all sectors of the economy, and companies across the stock market have been lowering guidance in recent weeks. But taken in the context of other recent events, it reflects a quickly deteriorating short-term situation at GE.
In particular, the news from General Electric's powerhouse aviation unit, which had been responsible for the company's best margins, has continued to worsen. On March 23, management announced a 10% reduction in GE Aviation's U.S. workforce and a temporary furlough of half of its U.S. maintenance, repair, and overhaul employees. On April 2, though, it went further, ordering a four-week furlough for half of its U.S. jet engine manufacturing workforce. Now guidance is withdrawn. What's next?
With a continuing global disruption in air travel and no word yet on when or if the Boeing 737 MAX will ever get back off the ground, what's next isn't likely to be anything good. S&P Global cited this as it downgraded its outlook on GE to "negative" on April 9.
2. Bad news from the oil patch
Oil price news might not seem to have a direct impact on GE, considering the company merged its oil and gas division with oil-field services company Baker Hughes (BKR -1.34%) in 2018. But GE still owns about 36% of Baker's stock. So when persistently low oil prices caused Baker Hughes to announce a restructuring plan on April 13, that wasn't good for GE. The plan includes about $16.5 billion in charges for Q1 2020, including a non-cash goodwill impairment of about $15 billion. For context, Baker's current market cap is only about $13.7 billion.
Those low prices seem likely to drag on for quite a while. A breakthrough OPEC+ agreement to curtail oil production beginning in May 2020 was greeted with a shrug by the oil markets, as the 9.7 million barrel/day cuts were seen as insufficient to offset a projected 19 million barrel/day drop in demand due to the coronavirus pandemic. Neither Brent nor WTI crude prices moved much after the announcement.
GE's remaining stock in Baker Hughes is an asset that the company had hoped to sell for a premium price. Now it looks as though it will have to divest its shares at a steep discount or hang onto them and hope for an eventual recovery.
3. Moving money around
Also on April 13, perhaps in an attempt to soothe investors rattled by S&P's downgraded outlook, GE released a statement about its efforts to shore up its battered balance sheet -- excuse me, "solidify its financial position."
The moves don't really include much that's exciting: raising liquidity and extending the maturity dates of existing debt through some new debt issuance, for example, and moving some of the proceeds from the $20 billion sale of its biopharma unit to its GE Capital arm to accelerate debt reduction there.
Again, by itself, this isn't particularly noteworthy: interest rates are very low, making it a good time to extend maturity dates and take on cheap debt to increase liquidity. It's also worth noting that GE has made major strides in debt reduction over the past five years, cutting more than $300 billion in debt down to its current level of about $90.1 billion. Still, that's about 50% higher than GE's market cap of about $60 billion.
This begs the question, though, of what arrows GE has left in its quiver if the aforementioned outlook continues to deteriorate. It's already sold a lot of its assets, like its appliances and transportation units, to raise cash. Its remaining shares of Baker Hughes are only worth about half what they were at the end of 2019, roughly $5 billion. Its other underperforming businesses wouldn't fetch much in a fire sale, and GE certainly doesn't want to part with the outperformers.
The only other easy option would be to take on more debt, which would start to undo the progress the company has made, and could result in additional credit downgrades.
Turnaround on hold
General Electric is in the midst of a multiyear turnaround process, which had been seeing some limited progress. CEO Larry Culp told investors that 2019 was a "transition year," and that the company would start seeing improvement in 2020. That timeline, though, seems to have been busted.
Risk-tolerant investors focused on the long term might eventually see an upside to buying in now and waiting for the company's plans to come to fruition. But considering these recent developments, most investors will be better off avoiding GE stock and looking for more promising opportunities.
