It's been an unusual last three months for General Electric (GE -0.76%) stock. The company delivered a well-received set of second-quarter earnings at the end of July. Still, even that wasn't enough to halt a period of significant underperformance compared to the benchmark S&P 500 index. So what's going on, and has anything changed with the long-term investment thesis for GE stock?

Delta force

The first reason the stock has underperformed is much higher profile and not hard to understand. Simply put, stocks in the commercial aviation sector have been weak due to fears that the delta variant of the coronavirus will forestall the recovery in commercial air travel. That matters to a business like GE because its aviation segment remains its most important earnings and cash flow generator.

Masked person about to enter an airplane.

Image source: Getty Images.

For example, going back to the year before the recent pandemic, GE Aviation generated $4.4 billion in free cash flow. It helped offset a $2.5 billion combined outflow at GE Renewable Energy and GE Power.

There's no way around the fact that GE's recovery is contingent on a recovery in commercial aviation. In addition, GE Aviation's engines are a critical part of the commercial aviation industry. For example, GE Aviation and its joint venture with Safran, CFM, together make up 67% of the global installed base of aircraft engines.

GE Chart

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Renewable energy blues

The second reason relates to GE's renewable energy segment and disappointing news around the industry at large. To be clear, wind energy (GE's focus) remains a long-term growth industry. Still, all the leading players -- Siemens Gamesa (GCTAF), Vestas Wind Systems (VWDRY -3.38%), and GE -- are forecasting flat or low growth in new installations over the next few years. Moreover, the industry is being hit by rising raw material costs. 

Strange things happen when end markets slow down, and history is littered with stories of companies that were forced to walk down guidance in the face of deteriorating near-term fundamentals. Unfortunately, that cynical view is supported by events in 2021. For example, contract wind blade manufacturer TPI Composites (TPIC -9.20%) has already warned of short-term overcapacity issues and scaled back production capability as a consequence. 

Five wind turbines in a forested area.

Image source: Getty Images.

Moreover, GE's big two rivals, Siemens Gamesa and Vestas, both issued disappointing updates over the summer, and the bad news has rubbed off on GE. For example, in the middle of July, Siemens Gamesa negatively revised its full-year guidance due to rising raw material prices and supply chain issues created by the pandemic. It's a common theme in the industrial sector, but whereas many other companies have been able to offset the cost increases by raising prices amid strengthened demand, that hasn't been the case with wind power.

Siemens Gamesa now expects full-year revenue at the low end of its guidance range of 10.2 billion euros to 10.5 billion euros. Management now forecasts its earnings before interest and taxes (EBIT) margin to be in the range of negative 1% to 0% compared to previous guidance of 3%-5%.

It's a similar story at Vestas, where management downgraded full-year revenue guidance to 15.5 billion euros to 16.5 billion euros from a previous range of 16 billion euros to 17 billion euros. Similarly, the EBIT margin is forecast to be in the 5%-7% range compared to a prior estimate of 6%-8%.

What it means for General Electric

It's hard not to conclude that GE Renewable Energy will also come under similar pressure. Indeed, it's notable that when CEO Larry Culp outlined his medium-term cash flow aims for each segment in June, Culp was relatively guarded on the medium-term outlook for GE Renewable Energy. 

Moreover, during the second-quarter earnings call, CFO Carolina Dybeck Happe talked of the potential for a negative impact on GE Renewable Energy's orders profile and cash flow generation in the second half. 

Looking ahead

All told, GE's stock underperformance probably comes down to both these issues, and investors shouldn't be surprised if management follows Siemens Gamesa and Vestas in lowering full-year renewable energy guidance. That said, the segment isn't a significant contributor to profits yet.

In addition, it's important to focus on the long-term development of GE Aviation and GE Renewable Energy. Both have bright futures, even if there are some potential negative headwinds brewing.