Please ensure Javascript is enabled for purposes of website accessibility

Why General Electric Shares Slumped in April

By Lee Samaha – May 4, 2020 at 9:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

General Electric faces significant challenges in 2020.

What happened

Shares of industrial giant General Electric (GE 5.85%) slumped 14.4% in April, according to data provided by S&P Global Market Intelligence. The move is particularly concerning when you consider that the S&P 500 index was up nearly 14% over the same period. Moreover, aerospace peers like Honeywell (HON 2.74%) and Raytheon Technologies (RTX 2.73%) also generated high single-digit returns in the month.

The reason for GE's decline probably comes down to a combination of its heavy exposure to commercial aviation and the fact that the other parts of its business are under pressure, too.

Passengers in silhouette standing in line at an airport terminal.

GE needs commercial air travel to make a comeback. Image source: Getty Images.

GE Aviation generated $32.9 billion in revenue in 2019, and its importance to the company's free cash flow (FCF) generation cannot be underestimated. For example, GE Aviation generated $4.4 billion in FCF in 2019, and helped offset cash outflows in the power and renewable energy segment. All told, GE's industrial businesses generated a total of $2.3 billion in FCF in 2019, and that figure includes $1.3 billion in FCF from the now divested biopharma business. Whichever way you look at it, GE Aviation is the key cash flow generator for the company.

It gets worse when you dig into the commercial/military revenue split at GE Aviation. Commercial aviation engine and services generated $24.2 billion in sales in 2019 compared to just $4.4 billion from the military side. Unlike Raytheon Technologies, GE doesn't have a significant military business on which it can fall back on for support during a potentially weak period for commercial aviation. In addition, Honeywell's income stream is much more diversified than GE's.

Even worse. GE Capital's most valuable business is actually an aircraft leasing business, GE Capital Aviation Services or GECAS --  horrible industry to be in during a downturn in commercial aviation.

Turning to the other parts of the GE portfolio, GE Power services will be negatively impacted by the lack of demand for electricity, and even GE Healthcare is being hit by patients deferring elective surgeries.

So what

Looking at matters from a brighter perspective, air travel will surely come back as travel bans are eased, and GE's dominant position in the installed base of commercial aircraft engines -- GE and its joint ventures contribute more than 60% of the engines in service in North America and Europe -- means it will generate substantive service revenue when planes get flying again.

In addition, power demand should improve in the future as economic growth improves from the low point in the second quarter. Furthermore, there's probably a fair amount of pent-up demand for healthcare equipment building up right now. GE will see better days ahead.

Now what

Unfortunately, it's far from clear what the shape of the recovery in commercial aviation will be. Even if you think consumer demand will pick up as containment measures are relaxed, you still have to factor in that governments worldwide are responsible for travel bans and the financial state of the airline industry. That's not so easy to predict.

Lee Samaha owns shares of Honeywell International. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$67.32 (5.85%) $3.72
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
$85.38 (2.73%) $2.27
Honeywell International Inc. Stock Quote
Honeywell International Inc.
$177.78 (2.74%) $4.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.