General Electric‘s (GE) turnaround continues to gain traction amid an aviation recovery and as the industrial giant continues to shrink its debt load. Is GE stock a buy right now?
In the second quarter, GE beat earnings views, while warning on inflationary pressures ahead. Wall Street generally took the view that General Electric continues to transform into a simpler and stronger company.
GE Stock Technical Analysis
Shares are forming a cup-shaped base with a 115.30 buy point, according to MarketSmith chart analysis. GE stock sits 11% below the entry, meaning it is far from a proper buying zone still. The industrial stock has been straddling the 10-week line as it bases, but was back above that support level on the stock market today.
The relative strength line for GE stock is falling again. It rallied late last year and in early 2021, within a multi-year downtrend. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.
The industrial giant earns a dull IBD Composite Rating of 60 out of 99. The rating combines key technical and fundamental metrics in a single score.
General Electric owns an RS Rating of 82, meaning it has outperformed 82% of all stocks over the past year. The Accumulation/Distribution Rating is a C+, on a scale of A+ to a worst E. It’s a sign of roughly equal buying and selling of GE shares by big institutions over the past 13 weeks.
GE remains a popular stock with strong institutional support. As of June, 1,911 funds owned shares. GE stock shows three quarters of rising fund ownership, according to the IBD Stock Checkup tool.
GE Earnings And Fundamental Analysis
On key earnings and sales metrics, GE stock earns an EPS Rating of 45 out of a best-possible 99, and an SMR Rating of E, on a scale of A+ (best) to E (worst). The EPS Rating compares a company’s earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.
In recent years, GE shed a biotech unit, its light bulb business, and a majority stake in its oil field services business. In March, GE announced a $30 billion deal merging its aircraft-leasing unit with AerCap (AER), using proceeds to lower debt. The deal is set to close by the end of 2021.
For Q2, GE earned five cents a share, beating views. Revenue rose 9% and also beat. In GE’s business segments, revenue increased 10% in aviation, 3% in power, 14% in health care and 16% in renewable energy segment. And GE’s industrial businesses generated roughly $400 million in cash vs. a year-ago cash burn of $2.068 billion, highlighting progress in its turnaround strategy.
“Momentum is building across our businesses, driven by health care and services overall, with aviation showing early signs of recovery,” CEO Larry Culp said in a statement. GE also raised its free cash flow outlook for the full year to $3.5 billion-$5 billion, while keeping EPS guidance steady. But General Electric faces intensifying inflationary pressure, Culp warned.
The FCF measure is closely watched as a sign of the health of GE’s operations and its ability to pay down debts. In 2020, GE generated $606 million in FCF, down 66%, but beating its own guidance. In fact, General Electric turned cash-positive a year ahead of schedule.
For full-year 2021, analysts forecast GE earnings of $1.97 per share, up from just eight cents a share in 2020. But that would still be below 2019 EPS of $5.20, FactSet says. GE earnings are likely to more than double to $4.10 a share in 2022 as sales increase 6%.
Out of 21 analysts on Wall Street, 13 rate GE stock a buy and eight have a hold, while none has a sell, according to FactSet.
Headwinds For GE Aviation Lifted
In 2020, Boeing halted production of the 737 Max jet for a few months after two fatal flights, which weighed on Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. Engine shop visits slowed while leasing customers sought short-term deferrals. As a result, GE Aviation slashed jobs by 25% and later warned of more cuts.
Now the Boeing 737 Max is flying again and airlines are starting to order planes again. Meanwhile, the market continues to shift from wide-bodies to longer-range, narrow-body aircraft, benefiting General Electric. A GE joint venture dominates the market for narrow-body jet engines.
The jet-leasing deal with Ireland’s AerCap marks the biggest splash so far in CEO Culp’s turnaround campaign.
Proceeds from the deal allowed GE to cut debt by $30 billion and bring the total slashed since 2018 to $70 billion. Eventually, General Electric is expected to exit jet leasing altogether, though it’s taking a 46% stake in the combined company for now.
Growing Momentum For GE Stock
CEO Culp’s top priority is improving General Electric’s financial position, while strengthening GE’s industrial core, as a maker of jet engines, gas turbines, wind turbines and hospital equipment.
In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.
The coronavirus pandemic hit GE Aviation — once its “crown jewel” — hardest. But GE now touts recovery or stabilization in key business segments, including aviation, gas power and health care.
Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.
GE continues to expect an aviation recovery in the second half of 2021. But it’s monitoring the Covid-19 delta variant.
Other core businesses aren’t out of the woods. For example, GE Power is stabilizing after a terrible slump in the market for coal- and gas turbines to generate electricity. But demand continues to shift to wind and solar energy, where GE has an emerging business.
Still, as GE’s financial condition improves, hopes for the dividend could follow. In December 2018, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, announced in November 2017 along with a broad restructuring, had halved the dividend to 12 cents.
The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends. GE stock’s current 4-cent annual payout offers a yield of 0.3%.
Rivals To General Electric
Rivals to General Electric include Raytheon Technologies (RTX) and Siemens Energy.
Raytheon and Rolls-Royce of Britain are major jet-engine rivals. Siemens Energy competes with GE in power. It emerged in September after Siemens (SIEGY) spun off its low-margin gas turbine business. Japan’s Mitsubishi Hitachi is another big power rival.
Is GE Stock A Buy Now?
General Electric is making progress in its long, ambitious turnaround. GE earnings and cash flow are expected to further improve in 2021, with the Boeing 737 Max flying again. Signs continue to mount of a slow recovery in the airline industry, and the broader economy is recovering as well.
Moreover, GE’s financial position continues to improve as it lowers debt and costs. The jet-leasing deal with AerCap should further help GE’s balance sheet.
Many analysts on Wall Street are bullish about GE’s current leadership and improving fundamentals. But others remain on the sidelines. And General Electric does not belong to a leading industry group.
Bottom line: GE stock is not a buy.
Over the long term, buying an index fund, such as SPDR S&P 500 (SPY), would have delivered safer, higher returns than GE stock. If you want to invest in a large-cap stock, IBD offers several strong ideas here.
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