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How Risky Is General Electric?

By Reuben Gregg Brewer – Oct 8, 2020 at 11:51AM

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Industrial icon General Electric has been working on a turnaround for over a decade, but things aren't getting any better.

General Electric (GE -1.31%) is a household name, but that doesn't mean it's a good stock to buy. In fact, the industrial icon has been working on a turnaround since the 2008-09 Great Recession. It hasn't been a particularly smooth ride, and while some parts of its operations are improving, others are still pretty bad.

Here are four key risks you need to think about before you consider buying GE stock.

1. The still-lingering problem 

When the financial crisis struck in the late aughts, General Electric was hit particularly hard. The reason is that the company had allowed its financial services arm to spread well beyond its original purpose of helping customers buy GE products. Having leveraged itself heavily in such areas as mortgages and insurance, the company got itself into a whole when the economy turned south and was forced to accept a government bailout, sell assets, take write-downs, and cut its dividend. 

Two hands holding blocks spelling out the words RISK and REWARD

Image source: Getty Images

Here's the thing: Even after jettisoning much of its non-core financial business, GE still has material insurance liabilities to this day related to long-term care policies it wrote. In other words, it's been more than a decade since the financial crisis, and investors still have to keep tabs on the fallout from General Electric's wayward financial forays. And worse, what's left in GE's control is the stuff that nobody else wants to touch. 

2. Cut to the bone

Another big risk for potential investors here is that GE has dramatically slimmed down. On the one hand, that's not a bad thing, as the company will now be focused on its industrial core, and it has used cash to reduce leverage. But it is important to remember that this is not the same company it was a decade or so ago, with assets in areas from television to trains. Today, General Electric is focused on just four divisions: aviation, healthcare, power, and renewable energy. 

One of the problems with this is that GE doesn't have much left to sell off for additional operating cash if it encounters more problems. In fact, the last material asset it sold was a piece of its healthcare division, which is basically the company's crown jewel asset. Yes, it raised around $20 billion, providing some important financial breathing room on the balance sheet. However, you could argue that this was something of a desperate decision given the importance of the division. To put a number on that, healthcare provided about a quarter of the company's industrial revenue in the second quarter, and it was the only division with positive segment margins. 

3. Speaking of margins...

Of the four businesses that remain at GE, power and renewable energy have been under significant pressure for a number of years. The company has been working to right-size these operations, but the progress has been slow at best. Accounting for about 50% of its industrial revenue in the second quarter, GE needs to turn power and renewable energy around before it can call its turnaround effort a success. It won't be easy, especially now that the aviation division is dealing with problems, too.

The main culprit is the steep drop in air travel following the coronavirus pandemic. Aviation is nearly 30% of industrial revenue, and there's only so much GE can do to get things back on track other than wait for air travel to pick up again. All three of these divisions had negative operating margins in the second quarter, and they could remain problematic for a long time. 

GE Chart

GE data by YCharts

4. Who's that knocking at the door?

Lingering in the background over the past couple of years has been some potential problems with the Securities and Exchange Commission (SEC). Although this all goes back to the company's financial division, specifically its long-term care insurance business, there was little news on this front until just recently -- but the recent news wasn't very good. GE warned that the SEC might take action on accounting decisions it made under previous management. 

So this simmering problem has just boiled over, adding a very real near-term threat to an already-worrying list of risks that GE is facing. Worse, it would be difficult at best for investors to handicap this issue since it involves complex accounting issues. This SEC investigation could end up costing GE, and its shareholders, a lot of money to solve. 

So how risky is GE?

General Electric is a turnaround stock and has been for a long time. That's an investment area in which only more aggressive investors should roam. Put simply, GE is plenty risky enough to keep both moderate and conservative investors on the sidelines.

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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