Is General Electric Really Recovering?

As of Friday’s closing bell, General Electric Co. (NYSE: GE) stock had added more than 25% in 2019. Very good, but still a recovery of only about half its share price of 12 months ago. A cut to the quarterly dividend to $0.01 announced in October followed by executive changes and reorganization of the Power division sent the shares to a 52-week low in mid-December.

Over the past month, GE stock has traded down around 12%, about half the year-to-date loss, and most of that loss occurred since the company announced second-quarter results on July 31. On that day, in a note to clients cited by Barron’s, JPMorgan Chase analyst Steve Tuva said, “The stock is up on the headlines, as it has been many times before, but, like in the past, the underlying core fundamentals are actually a bit worse.” A lot of investors appear to agree with him.

Tuva on Monday reiterated his Sell rating on the stock, along with his price target of $5 a share, the Street’s lowest. He cited three issues: free cash flow, orders for the Power segment and margins in the Aviation segment. The free cash flow numbers have been juiced by selling receivables at a discount to rake in more cash earlier, but GE has been doing less of that lately. According to Gordon Haskett analyst John Inch, eliminating the effect of factoring, as the process of selling receivables is known, GE’s first half 2019 free cash flow is down by more than $2.5 billion year over year. Inch also maintains the equivalent of a Sell rating on the stock with a price target of $7.

Among the more bullish analysts is Wolfe Research’s Nigel Coe, who attributes about $600 million in the lower first-half cash flow to the grounding of Boeing’s 737 Max. RBC’s Deane Dray is another bull who considers CEO Larry Culp’s turnaround progress to be good, citing progress with free cash flow “as the most important indicator” of that progress. RBC has the equivalent of a Buy rating on the stock and a $13 price target.

GE bondholders are also bullish. GE Capital’s 2.5% senior unsecured notes maturing next March traded at 100 cents on the dollar two weeks ago (up from $0.944 in mid-November), and the 2.746% senior unsecured bond traded at 99.94 cents, up from $0.958.

The issues in the Power segment are not entirely due to poor execution. The company may have made a strategic mistake by putting so much effort (and cash) into perceived demand for the huge turbines used to generate electricity. GE was not only betting on gas-powered turbines with its Alstom acquisition. The company also was wagering that demand for fossil fuels like natural gas and oil (recall the Baker Hughes acquisition) would continue to rise. That is not happening and maybe never will.

As for the Aviation segment, profits were down 6% in the second quarter, partly due to the grounding of the 737 Max and partly due to GE’s own troubles. Boeing’s inability to deliver new 737 Max aircraft means the GE doesn’t get paid for the engines it builds for those planes. That will sort itself out eventually, but the Aviation group also has encountered a technical issue with turbine blades for Boeing’s new 777X dual-aisle airplane that has pushed the plane’s first flight into next year and may delay delivery of the plane beyond the currently expected timeframe of late next year.

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