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Why Shares of General Electric Are Higher Today

By Lou Whiteman – Updated Aug 24, 2020 at 3:18PM

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A vaccine-driven turnaround in aviation would be good news for the company's aerospace unit.

What happened

Shares of General Electric (GE -2.56%) traded up 5% on Monday, a strong day for shares of airlines and aerospace suppliers as well. The moves are tied to positive developments in the global fight against the coronavirus, which investors hope could mean a faster-than-feared return for air travel.

So what

General Electric came into 2020 with a lot on its plate. Last year CEO Larry Culp kicked off what was expected to be a multi-year turnaround plan focused on fixing the company's struggling energy businesses and paying down debt.

Aerospace, and more specifically GE's massive aircraft engine unit, was expected to be one of the company's few bright spots. It was also expected to be a cash-generation machine that would help fund a turnaround elsewhere. But the pandemic changed all of that, causing airlines to retrench and decreasing revenue for GE's engine business and other suppliers.

A GEnx engine

Image source: General Electric.

Earlier this year GE announced layoffs in the aerospace unit, which, instead of a standout division, has become another problem for Culp to fix.

Aviation, and with it GE's aerospace division, is going to remain in a slump until passengers feel safe flying again, and that is unlikely to happen until there is a widely available vaccine. The stocks were up Monday on reports that President Donald Trump could green-light an experimental vaccine by October.

There was also good news in the effort to treat COVID-19, as the Food and Drug Administration over the weekend decided to grant emergency use authorization for an experimental plasma therapy.

Now what

GE investors got good news on Friday, too. The company announced it had extended Culp's contract by two years to 2024. While the company's facing significant challenges the CEO has generally received high marks for his effort to stabilize GE and get it back on track.

A once-again booming aerospace business would certainly make those challenges easier to handle, but investors should be careful not to get ahead of themselves. Vaccines and new medicines take significant time and resources to come to market, and just because things are heading in the right direction at this moment we still don't know if the treatments will be effective.

Even when we get a vaccine, airlines are likely to remain conservative when adding new flying because of the large amount of new debt they have taken on during the crisis. While engine-makers like GE should benefit whether airlines restore flights by buying new planes or by reactivating planes currently parked in storage, it's likely to be a gradual process.

GE shareholders have long abandoned hope for a quick fix, with the stock down more than 70% over the past three years. Even if the good news is speculative, Monday's rally suggests any small step in the right direction will be well received by investors.

Lou Whiteman 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.

Stocks Mentioned

General Electric Stock Quote
General Electric
GE
$84.66 (-2.56%) $-2.22

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