For the sixth time this year, the stock price of beaten-down conglomerate General Electric (GE 0.01%) has dropped below $7 per share, near its all-time low. Investors who enjoy sniffing out bargains are probably wondering if it's a good time to buy.
The short answer? No.
The longer answer? While some of the company's valuation metrics have slipped to all-time lows, there are good reasons for that. Here's why investors should avoid GE stock right now.
Image source: Getty Images.
1. Its bad businesses are still bad
Since 2007, General Electric's portfolio has changed a lot. Back then, it included media, credit cards, mortgage lending, oil and gas, biopharmaceuticals, and locomotives, alongside iconic GE products like kitchen appliances and light bulbs. Well, all of those businesses are -- for better or for worse -- gone.
What the company has left are four industrial divisions:
- GE Power, which chiefly manufactures large gas turbines for power generation;
- GE Aviation, which makes aircraft engines;
- GE Healthcare, which focuses on equipment like MRI and ultrasound machines; and
- GE Renewable Energy, which includes wind turbines, hydroelectric plant components, and electrical grid infrastructure components.
Unfortunately, the bottom has fallen out of GE Power's gas turbine market. With renewable sources like wind and solar getting cheaper and more desirable, it's questionable whether that market will ever recover. In 2019, the segment burned $1.5 billion in cash and only turned a $400 million profit.
You might think that GE Power's loss would be GE Renewable Energy's gain. Unfortunately, it's also burning cash ($1 billion in 2019). General Electric's hydro and grid businesses -- inherited through its disastrous 2015 Alstom Power acquisition -- are dead weight, dragging down the unit's performance despite decent wind turbine sales. Hydro and grid sales are also unlikely to see major recoveries.
2. Its best businesses are on hold
That leaves Healthcare and Aviation to do the heavy lifting. CEO Larry Culp scored a coup when he sold off GE's biopharma business to his former employer Danaher. The move raised much-needed cash, but it is likely to significantly reduce the healthcare unit's formerly impressive margins.
GE Aviation had been by far the brightest spot in the company's portfolio, even after the world's Boeing 737 MAX jets -- for which GE was the sole engine supplier -- were grounded. But that was before the coronavirus flattened the air travel industry, sending global air traffic down 63%, and cutting domestic air travel by 95%. Sixteen-thousand planes are mothballed worldwide, and demand for new ones has unsurprisingly collapsed.
Then there are Renewable Energy's wind turbines. Right now, GE is only active in the onshore wind turbine market, but offshore seems to be where the industry is heading. To its credit, GE is trying to play catch-up by developing an extra-powerful offshore turbine called the Haliade-X. It's still being tested, though, and production isn't even slated to begin until the second half of 2021. That means it's likely to be at least a few years before the renewable energy business can make a meaningful contribution to GE's bottom line.
3. No Culp-ability
To his credit, since taking the helm of GE in October 2018, Culp has been doing an outstanding job playing the bad hand he inherited. He's been successfully paying down debt, cutting costs, and restructuring what's left of the company.
Even Culp, though, can't work miracles. He's chosen to prioritize internal changes to the company's structure and efficiency rather than external changes like expanding into new markets. Of course, when your company is unprofitable, awash in debt, and barely cash flow positive, you can't exactly make big acquisitions or significantly ramp up research and development. And there's nothing Culp can do to resuscitate the markets for aircraft or giant gas turbines.
Culp had originally touted 2019 as a "reset year," with better performance to come in 2020. Even before the coronavirus hit, though, the company had already started indicating that 2020 would be another reset year, with growth expected in 2021. Now, GE has withdrawn its guidance, indicating that investors may have an even longer wait.
Steer clear
When a company's best-case scenario involves multiple years of underperformance, and it doesn't pay a decent dividend to reward investors for their patience, there's not much point to buying the stock, because the best-case scenario rarely turns out to be the actual scenario.
General Electric now has a multiyear history of being unable to execute its turnaround plans on time. Investors should look elsewhere and check back in 2021.
