General Electric: Bulls Vs. Bears

Summary

• GE shares have plummeted over the past two years, falling to a nine-year low. But there are still questions about where it's headed next.
• Bulls point to a longer time horizon and too much pessimism in the stock, while eyeing $11 as an interesting entry point.
• Concerns over GE's power unit and continuing negative momentum highlight the bears' views.

Written by Nathaniel E. Baker, Seeking Alpha Editor and contributor.

Editors' Note - this was published just before news broke that GE was replacing John Flannery as Chairman and CEO with Lawrence Culp. GE also announced a $23B impairment charge to GE Power.

General Electric's (NYSE:GE) stock has dramatically underperformed the broader market the last two years, plunging 60% while the S&P 500 has gained 35%. There are several reasons for its malaise. The company has been beset by accounting problems, its flagship power segment has struggled, and poor investment decisions have caused debt loads to pile up. And that's just for a start. Some analysts have started to question if CEO John Flannery is the right person for the job, with a few calling for his removal.

With shares at a nine-year low, Seeking Alpha authors are debating (sometimes quite passionately) the company's merits as an investment. Below is a synopsis of six recent Seeking Alpha articles, split evenly between three bullish arguments and three bearish ones. Who's right? Only time will tell. The articles below certainly make convincing arguments for either case. Read on, and have your say in the comments below.

Bulls

1. The market is overly pessimistic about GE's problems and the stock is a compelling buy as it continues to drop, according to Chris Lau. The company's turbine problems that caused a three-day sell-off last week are relatively minor and should ultimately have little effect on its bottom line. "On a sum of the parts basis, GE stock is trading at a very large discount to its peers," Lau writes, with markets not pricing in any chance of the company’s business recovering. If shares approach the $10 to $11 range, the opportunity is truly compelling for Lau, who has a $15 target price for the stock.
2. GE's short-term issues are real, but the market is overreacting as a significant decline in the company's value is not likely over the long term, says Daniel Jones. GE's stock is being punished because the market has come to distrust management and dislike all news that isn't exclusively bullish. The fundamentals remain intact and "at the end of the day, fundamentals must always decide the outcome for any investment."
3. GE's biggest problem is its debt pile, which the company is doing its best to reduce, writes Aristofanis Papadatos. Its other headwinds, such as the oxidation problem with its turbines, are mainly short term in nature and can safely be ignored by long-term investors. So too can issues facing its flagship power segment, which now generates only 13% of operating profit. The company's two most vital segments, aviation and healthcare, are continuing to grow. Still, investors should wait until the stock drops to $11 before buying.
4. While many view a dividend cut as a sign of weakness, W.G. Investment Research says it would remove a major overhang on the stock. For investors with a longer-term time horizon, this might be the best move. W.G. Investment Research also looks at the $11 range as compelling.

Bears

1. General Electric remains in a strong downward trend, writes Giovanni DiMauro. Investors buying the most recent dip "will be punished yet again as fear and pain take center stage," as GE is a long turnaround story that has yet to gain any traction. Shareholders are facing "extreme exhaustion," according to DiMauro, whose downside thesis of $9.41 per share "is becoming more of a possibility than a probability."
2. The decline in GE's stock price below $12 "implies that there is a significant paradigm shift at work" and investors should be more proactive to protect against further losses, says an Options Market report. There are concerns GE is deviating from its original restructuring plans, with a recent decision to spin off part of the aviation unit seen as throwing in the towel on what is arguably the company's crown jewel.
3. GE is a sell as declines in its power unit make achievement of investment grade debt much more difficult, according to Edward Ambrose. Margins in the unit are declining and management is not realistic about these prospects.
4. GE's recent trouble with its turbines may be a sign that the company is sacrificing quality for profits, writes Shock Exchange. As the company reorganizes its businesses to simplify, the question of how well those business will do remains.

Conclusion

Even the bulls say the opportunity is not quite right to buy yet, and speak to certain structural problems in the business. On the flip side, bears are not willing to say all is lost yet, with many acknowledging there could be an entry point for bargain hunters before too long. Neither side is particularly (or at all) fond of current management.

Nor are Seeking Alpha readers. "The once 'best in class management' has turned into the gang that couldn't shoot straight," said vince 111. "I've lost all confidence in management and the board." "The new managerial team lacks communication skills," said billrla. "Enough with the charts and the finance-speak. Talk to investors plainly and talk about GE and its products, not about management's latest efforts to sell-off 'non-core assets'."

Still, it seems the right type of divestiture - of parts of GE Capital specifically, as that unit holds most of the company's debt - would be cheered by the market. A positive earnings report could also be a catalyst for a rally in shares. The next quarterly earnings announcement is Oct. 25. Set your calendars.

What are your views on this stock? Which articles have you found most helpful? Post your thoughts below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.