The rally in General Electric (NYSE:GE) stock has proven to be short-lived. GE stock saw a nice bounce of about 20% from April lows, as investors began to bet that all but the worst was priced in. But GE has given back most of the gains, and near $13 is threatening to re-take 52-week — and 8-year — lows.
From here, it’s not hard to see why. As I argued in a detailed piece last month, I still think GE stock is worth roughly $9-11 per share, or 20-35% below current levels. CEO John Flannery continues to warn investors about near-term growth, the GE dividend remains at risk, and liabilities remain a key concern.
Even with General Electric stock down 54% over the past year, there’s still a sense that some investors are seeing GE for what it was — and not what it is. But a full accounting of the company’s current situation shows not only that GE isn’t worth chasing at $13 — but that there could be more downside ahead.
More Bad News for GE
GE stock hit a three-month high towards the end of May — and then the steady drumbeat of bad news began again. On May 22, Flannery admitted that GE Power continued to struggle, and said the company didn’t see any profit growth coming this year. Investors took that as a sign that GE’s dividend, already halved in November, could be facing another cut. GE dropped over 7% on the day.
A week later, JPMorgan Chase (NYSE:JPM) analyst Stephen Tusa, who’s been ahead of the GE story for some time now, cited an “underappreciated risk” of more capital needs at the struggling GE Capital business. GE stock already had tanked earlier this year when the company announced a surprising $6.2 billion charge relative to long-term insurance. Tusa’s analysis suggests more ugly surprises are on the way.
This week, Fitch Ratings seemed to support Tusa’s contention. The agency downgraded GE’s debt, after changing its issuer default rating back in November. And there is now talk of a fine in France, after GE admitted it wouldn’t meet job targets agreed to in its 2015 acquisition of Alstom.
On their own, none of the events necessarily seem to be devastating for GE stock. Analysts are bearish on stocks all the time — and not always right. A dividend cut doesn’t mean GE is heading to $0 — or even to $10. And GE’s debt still is rated A by Fitch.
But in sum, the events of the past month are putting more pressure on GE stock. And they’re overshadowing what little good news GE bulls might see at the moment.
Good News for GE?
To be fair, there have been a couple of green shoots in terms of the General Electric turnaround. While Flannery’s outlook in May seemed muted toward GE Power, the CEO did reaffirm full-year guidance for GE as a whole. Analysts still don’t trust that guidance. Consensus sits at $0.94 against the company’s range of $1-$1.07. Hitting this year’s targets — and beating the Street — could boost confidence in GE stock.
Similarly, GE hasn’t cut its dividend yet. In fact, its distribution declared on June 8 was kept intact. And James Brumley made the case on this site that GE’s dividend was safe — probably.
For investors who believe in the GE turnaround, the decline of about 12% from May highs is coming on no news — or at least little news. This is going to be a multi-year process, after all. A steady dividend and hopes of hitting 2018 targets should drive at least some confidence.
The Problem With GE Stock
But the problems here remain. And the biggest problem is that the numbers simply do not work. Even giving credit for the strength in the Aviation and Healthcare businesses, GE’s market cap of $115 billion still seems far too high. Pension liabilities are an obstacle to a break-up. The debt load is a concern. And as Brumley pointed out, one reason not to cut the dividend is that even a cut doesn’t necessarily get GE out of its hole.
In fact, the news of late is more bearish, because it hits GE where it is weakest. To see upside from $13, GE needs to create value not from the growing businesses — but from the struggling ones. Yet Flannery is admitting that turbines in the Power business aren’t coming back until 2020. A respected analyst is seeing more weakness in GE Capital.
If GE can’t rescue — or sell — one of those struggling businesses, there’s simply little, if any, upside in GE stock. The long-awaited sale of the Lighting business isn’t moving the needle — the unit probably will fetch less than $2 billion at this point. Aviation and Healthcare aren’t covering the dividend, given needs from pension and debt. And the concerns about the gap between GE’s cash flow and its reported earnings aren’t going to end until investors have some belief that the worst is behind GE Capital.
From here, GE still looks overvalued. Meanwhile, the events of the past month show that the company isn’t on the path toward proving the bears wrong. If anything, the bears have more ammunition. And so it’s little surprise that GE’s brief rally has come to a sudden end.