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Better Buy: General Electric vs. Boeing

By Reuben Gregg Brewer - May 16, 2020 at 10:20AM

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Two iconic companies facing hard times. Is one of them a better investment option than the other today?

Aerospace giant Boeing (BA 0.52%) and industrial conglomerate General Electric (GE 1.10%) have both seen their stocks fall sharply. Although they each have iconic names, you need to understand a little more about what's happening at these companies before buying either stock. The truth is, they are each working through material headwinds right now.  That said, as Boeing and GE muddle through their respective rough patches, does one look like a better buy than the other?

Dealing with headwinds

If you pay any attention to the news, you know that Boeing's 737 MAX aircraft has been grounded because of a pair of crashes. It was supposed to be a major product for the aircraft maker and was expected to support financial results for years into the future. Boeing is working with regulators to get the 737 MAX back in the air, but it hasn't been going well. In the meantime, airlines have been canceling orders. Cancellations have only picked up since the effort to slow the spread of COVID-19 has led to economic shutdowns around the world. That's not shocking given that travel has slowed to a crawl and Boeing's customers are in a financial bind.   

A hand drawing the words risk and reward on a scale

Image source: Getty Images

General Electric feels the pain here, too, because its aviation segment is one of its most profitable divisions. This business builds the engines that go into aircraft made by companies like Boeing, notably supporting those engines with parts and service throughout their useful lives. With air travel plunging, aviation isn't quite as profitable as it has been in recent years. For example, segment margins in the division fell 6.5 percentage points year over year in the first quarter. Perhaps more troubling, GE noted this division as one the hardest hit by the impacts of COVID-19, as travel ground to a halt, airlines sought to conserve cash, and future consumer travel habits remain a big question mark. Management believes there will be a long-term hit here, highlighting that reduced travel has led to a drop in engine deliveries and a material decline in demand on the highly lucrative services side of this business. 

While that's only one of four major divisions, two of the remaining ones (power and renewable energy) have negative margins. That leaves just the healthcare division as a bright spot. But that's overshadowed by the company's lingering problems within its financial arm, which, under previous leadership teams, strayed well beyond its core purpose of supporting the purchase of GE products That includes buying and leasing out the airplanes into which GE engines get placed, a business that management expects to face notable headwinds because of the steep drop in travel. The company has been working for years to clean up the finance arm and turn around the power and renewable energy businesses, but it hasn't been easy. Progress would best be described as slow.   

To put it bluntly, while their names are iconic, GE and Boeing's businesses are anything but hitting on all cylinders today. In fact, they are both probably best viewed as turnaround stocks right now. 

And the list of issues continues

Once you see GE and Boeing this way, the truth is that most investors should probably avoid both until there are clearer signs of improvement. However, more adventurous types might still want to jump aboard while the companies are struggling in the hopes of picking up shares at a beaten-down price. Boeing, for example, is down roughly 70% from its most recent high-water mark, and GE is off its highs by nearly 90%. But does that make them good deals?

GE Chart

GE data by YCharts.

Clearly, as noted above, both companies are facing big business issues that will take time and a lot of effort to turn around. But there's more to this story than just that. For example, General Electric has been working overtime to reduce leverage. That effort has required it to sell massive portions of its business, including a big piece of the healthcare division. Healthcare is one segment that appears to be holding up well today. And still, even after material portfolio changes, the company's debt-to-equity ratio remains four to five times higher than some of its closest peers. Moreover, it had negative cash flow in the first quarter. There's a lot of moving parts in that number, but burning cash just means that the turnaround is still a work in progress.   

Boeing, meanwhile, isn't in much better shape today. Sure, GE is facing trouble on multiple fronts, but at least it has a widely diversified portfolio of businesses. Boeing's problems are in its aerospace operation, which made up roughly 55% of its business in 2019. And the impact has been huge, with revenue is the segment off by nearly 50% in the first quarter. Its military, security, and space operations are holding up relatively well, down just 10%, but it's not nearly enough of an offset. Now add in a heavy debt load (its debt-to-equity ratio is around 0.4) and the fact that the company isn't covering its interest expenses today. In fact, with COVID-19, there was even talk of Boeing perhaps needing a government bailout. That didn't happen, but only because the aerospace giant added more debt to its already leveraged balance sheet. The company is doing what it has to in order to muddle through a tough time, but the steps it is taking are likely to extend the turnaround effort. 

Stepping back, it doesn't look like either industrial giant is in great shape today. And there's still likely to be a long slog ahead before their businesses start to improve. More diversified GE probably has a leg up on Boeing because there are more segments to fall back on for support (and at least one is still performing relatively well). But that's not exactly a compelling reason to hit the buy button when there are other industrial conglomerates out there that aren't dealing with self-inflicted wounds. 

Is one really better than the other?

The ultimate answer in the Boeing vs. GE battle royale is that neither one is a particularly good investment option today. Most investors would be better off looking elsewhere. However, if you are dead set on buying one of these "down on their luck" companies, then the diversification in GE's business is probably the safer bet. But don't go in expecting a quick turnaround...there's probably more pain ahead for both companies before things will start to get better.

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

The Boeing Company Stock Quote
The Boeing Company
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General Electric Company Stock Quote
General Electric Company
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