General Electric: The Injured Behemoth's Future

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About: General Electric (GE)
by: Sandeep Singh Ahluwalia

Summary

From January 2017 General Electric's share price has fallen by 69%.

General Electric has slashed its quarterly dividend to $0.01 per share.

The SEC has widened its probe into the accounting practices of General Electric.

The split of GE's power business is an interesting and beneficial approach for the future.

Moody’s downgraded the conglomerate’s credit rating from A2 to Baa1.

Since January 2017, the share price of General Electric (NYSE: GE) has been in descent, which has resulted in the stock losing 69% of its value. Hence in this article, I shall ascertain the possibility of the equity having a further fall, to the $8.55 mark. To establish the likelihood of this occurring, I shall look at the fundamental weaknesses of the stock, whilst also analyzing the charts using technical analysis tools.

Fundamental weaknesses:

Dividend crisis:

Investors of General Electric may believe that last year was rough on them as the firm reduced its quarterly dividend by 50% to $0.12 per share. However, that move now looks like a warm up act, as on 30th October General Electric slashed its quarterly dividend to $0.01 per share. This is a 96% reduction from a year ago.

However, when analyzing the firms financials, I believe that the Mr. Larry Culp didn’t really need to make such as drastic reduction in the dividend. The conglomerate is not under a cash crunch. I say that as the cash balance of General Electric increased slightly in the prior quarter, even though the firm has paid out more than $1 billion in dividends. Moreover, I expect the cash balance to improve in the next quarter, due to the seasonality of General Electric’s cash flow.

Furthermore, General Electric's cash flow will be receiving a boost in the latter part of 2018, as asset sales and spinoffs will provide sizable cash windfalls. This is as General Electric in the last quarter sold off its healthcare business for $1.05 billion. Moreover, it is also expected to finalize the sale of its distributed power business in the fourth quarter which will bring in a whopping $3.25 billion. These two deals will result in the firm netting more than $1 billion in revenues by year end. I say that as the GE will be paying out $3 billion for several joint ventures it has with Alstom. Furthermore, these are not the only sales the firm has lined up. This is as in 2019, the company shall finalize the sale of its transportation division which will bring in instantaneous cash proceeds of $2.9 billion. Additionally, this sale shall also boost General Electric’s balance sheet as it will be receiving $1.9 billion worth of shares.

Due to this, I do not see why the firm couldn’t have maintained its dividend level and still been able to clear its debts using proceeds from asset sales. The only reason I believe the firm decided to cut its dividend rate to nearly zero is due to management wanting to avoid a credit rating downgrade. However, I believe this is a lost cause as Moody’s and S&P Global have already downgraded the conglomerate’s credit rating. Moreover, the only reason I believe General Electric chose to maintain the small dividend rate is so that institutional investors who look out for dividend paying stocks don’t sell their shares. However, I believe this plan will also backfire as no sane institutional investor will hold onto a stock whose share price is in constant decline, plus is paying out a dividend that can effectively be classified as zero.

Securities and Exchange Commission Investigation:

The Securities and Exchange Commission has decided to widen its probe into the accounting practices of General Electric. This is as the SEC decided to include a $22 billion transaction the firm incurred whilst making acquisitions for its power business in the third quarter. The matter is made worse by the fact that the Justice Department is also scrutinizing the same $22 billion transaction.

This isn’t the first-time General Electric is getting investigated by the Securities and Exchange Commission, as in January the SEC commenced an investigation into the firm’s accounting practices. The earlier probe was commenced due to a miscalculation made by the firm in one of its insurance subsidiaries. This miscalculation cost the firm a whopping $15 billion. All this shows that General Electric is wrapped in scandals that will cause its share price to tumble. However, I would like to focus onto the $22 billion charge as it emphasizes on the failings the firm has made in its power division. Moreover, it clearly shows that the firm is broken and in need of desperate repair.

Downgrade credit rating:

In October 2018, S&P Global reduced General Electric’s rating by two notches from A to BBB+. Moreover, the scenario was made worse last week as Moody’s downgraded General Electric’s rating from A2 to Baa1. This is in my opinion will place an immense pressure on the management to correct the prior made mistakes. Moreover, the credit rating downgrade is terrible news for General Electric as a lower credit rating across the board will increase the firm’s capital costs.

General Electric’s power troubles:

General Electric’s key operational challenge is the firm’s troubled power segment. This is as the segment has been grappling with lower demand levels for its gas turbines coupled with a drop-in its market share. In the latest earnings meeting, the new CEO stated that he will be splitting the power segment ino two so as to make an attempt to revive the power business. One unit shall be a combination of the firm’s gas turbine and services business, whilst, the second unit shall be made up of the other assets in the power segment such as the nuclear, steam and grid solutions.

I find the split of the power segment an interesting and beneficial approach for the future. This is as it fundamentally creates a ‘negative depository’ for the gas turbine and services business. Whilst, on the other hand it creates a ‘positive depository’ for the division’s other assets. This I admit will not fix the mistakes the firm has made but I believe this is a step in the right direction. Nevertheless, the most difficult challenge the firm will have to overcome is the weakening of demand levels for its power equipment. I do not blame General Electric’s management for this as it is not their own doing. I say that as demand levels have fallen due to renewable energy technology coming cheaper. However, I still believe investors should not write off this segment, as not all the subdivisions are exposed to the above-mentioned problem. This is as General Electric’s power generation equipment and grid division are receiving a sufficient level of future sales from industrial manufacturers. The only problem is that the value of the future sales is being dwarfed by the problems facing the other segments. Thus, I believe this internal breakup will be a step towards the right direction as it isolates the healthier assets from the problematic ones. This may not help the share price as of now but in the long run it will be very beneficial for the firm.

Technical Analysis:

Daily Chart:

General Electric Daily chart The stock’s daily chart indicates that, in the coming days, traders can expect a box range pattern after which we will have a further bearish fall. I anticipate a box range pattern due to the formation of a ‘High Wave’ candle pattern at the 161.8% fibonacci support level. This candle pattern’s psychology indicates to investors that the market is confused or as the Japanese say the market has “lost its sense of direction”. Moreover, the pattern is reinforced as the stock has broken out of its Bollinger band with the candles real body, thus, indicating that a sideways formation will be occurring.

On the price target front, I expect the upper line of the box range pattern to be at the 127.2% fibonacci resistance level at $10.80. However, if it does breach this level then I do not expect the box range to go above the 161.8% resistance level at $11.07. Moreover, for support, I expect the box range to utilize the 161.8% fibonacci support level at $9.90.

On the indicator facet, the RSI has just commenced a slight ascent and its value is at the 1 mark. Thus, this support my belief that General Electric shall be having a sideways pattern. Moreover, the accumulation and distribution rating has flattened out after being in steep descent therefore signaling to investors that the market has turned neutral.

Weekly chart: General Electric Weekly chart

General Electric’s weekly chart is the reason why I expect a downfall in the stock’s value in the coming weeks. I anticipate this due to the formation of a ‘Three Black Crows’ candle pattern. I believe this to be the pattern, as the stock has already formed the first two large bearish candles with very small upper and lower wicks. This pattern’s psychology indicates to investors that the bears are running the show. Moreover, the current candle pattern has broken below the 100% fibonacci support level at $10.53, which signals to traders that the bearish trend is sturdy.

On the price target front, I expect the stock to fall till between the 127.2% and 161.8% fibonacci support levels. The 127.2% support level is at $9.66, whilst, the 161.8% support level $8.55. However, once the equity does reach these levels then I expect a sideways pattern to form.

On the indicator facet, the long-term RSI of the stock is in steep descent which signals to investors that the bearish run is here to stay. Furthermore, the ADX settings have both perched at the same spot, thus, demonstrating to investors that there is an ongoing build-up of bearish pressure.

Overall picture:

Overall, General Electric has made several mistakes that have resulted in the firm entering a rut. Thus, I am leaning towards the bears pushing the value of the stock to the $8.55 mark. This is driven by the fact that the technicals support a descent in the stock’s value till that point. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

Good luck trading.

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.