General Electric: Losers Stay Losing

Summary

• General Electric was a bad investment over the last couple of years, and ran into operational problems through 2019.
• In 2020, things got even worse, due to the impact the coronavirus pandemic has on GE's businesses.
• Shares have lagged both the broad market and its peers, and rightfully so.
• If management can successfully turn this ship around, shares could recover a lot of ground. But we believe that it is more prudent to go with higher-quality choices in the industry instead.
• This idea was discussed in more depth with members of my private investing community, Cash Flow Kingdom. Get started today »

Article Thesis

General Electric (NYSE:GE), which has had more than its fair share of problems during the last couple of years, has run into a range of additional problems caused by the coronavirus pandemic. This includes, but is not limited to, headwinds for its aircraft engine business, which normally is the company's crown jewel.

Shares are not trading at an expensive valuation relative to the revenues that the company generates, but due to General Electric's myriad of problems, going with other industrial names may be the better choice for investors.

Source: Seeking Alpha's image bank

Core Peer Siemens Was The Better Choice

A couple of months ago, we wrote an article detailing why we believed that Siemens (OTCPK:SIEGY) (OTCPK:SMAWF) was a better pick compared to General Electric. This article was centered around factors such as a stronger balance sheet for Siemens, a more attractive product lineup with more exposure towards higher-growth markets such as Industry 4.0, and a more efficient way of operating the company. Since then, the performance of Siemens and General Electric has been quite different:

Data by YCharts

Since then, Siemens' shares are down 13%, virtually on par with the Dow Jones Index (DJI) (DIA), while General Electric has generated a total return of -43% in the same time frame. This was not based on a weaker performance during the midst of the market sell-off, where Siemens and GE had dropped more or less the same. Instead, the market's cognition that Siemens was much better positioned to weather the current crisis has allowed Siemens' shares to recover most of the losses during April and May.

Siemens is not the only peer we can compare General Electric to, the following chart could be quite illustrative, especially regarding items such as ROIC or interest coverage:

Source: StockRover.com

Note: Margin of Safety = the difference between fair value using discounted cash flow analysis and price.

Yacktman Forward RoR is the normalized average free cash flow of the past seven years plus the expected 5-year growth rate.

General Electric's Issues Are Getting Worse

This brings up the question of why General Electric's share price has not recovered, as the market seemingly is not seeing an easy recovery for General Electric.

This is due to a range of reasons, the first one of these is that General Electric is lacking the backlog that Siemens has. In fact, Siemens was even able to grow its industrial backlog further during the first quarter of 2020, despite the emerging pandemic. A large backlog allows Siemens to keep its factories running during times when new orders are at a below-average level, which will undoubtedly be the case for Q2, and likely for the remainder of 2020 as well. Siemens can keep producing and selling its products to customers that have ordered in the past, while General Electric's smaller order backlog prevents the company from keeping utilization high. Lower utilization of General Electric's factories, in turn, means that revenues will drop. Even worse, margins will compress further, as fixed costs remain in place while gross profits will decline.

Data by YCharts

For a company that already has below-average margins relative to its peer Siemens, and also relative to other industrial heavyweights such as Honeywell (HON) and 3M (MMM), the outlook of further margin compression is disastrous.

The lacking backlog to combat a period of lower orders, which will lead to lower profitability, is only one factor, though. On top of that, General Electric's jewel, its aircraft engine business, is facing the steepest headwinds in its history. The current pandemic poses the biggest threat to global airlines that has ever existed, which forces many airlines to cancel orders for new aircraft in order to preserve cash to battle the current crisis. This results in lower aircraft production rates from the two industry leaders Boeing (BA) and Airbus (OTCPK:EADSY). Those two commercial jet producers buy most of their engines from General Electric and from Rolls-Royce (OTCPK:RYCEY), but as they are reducing their output, purchase volumes decline as well.

This means that General Electric's aircraft engine business, which has reported strong growth rates in the past, will likely see meaningful pressures in the near and medium term. Analysts had valued the unit at anywhere between $50 billion and $100 billion in the past. With the large and multi-year negative impact of the coronavirus crisis on global air travel, it could be argued that the value of the unit has dropped by dozens of billions of dollars.

Data by YCharts

Over the last three months, the market capitalizations of Airbus and Boeing have dropped by around 45%. As a core supplier to these two companies, one could assume that the value of General Electric's aircraft engine business may have also lost a similar share of its value. Using the original estimate for the unit's value, this equates to value destruction of $22.5 billion-45 billion over the last couple of months, for just one of General Electric's units. This may not be the ultimately correct amount of lost value, as the market could be valuing Boeing and Airbus too conservatively right now. But based on the massive impact that the current crisis has on global airlines, it does not seem unreasonable to assume that General Electric's crown jewel has easily lost $10+ billion of value.

The unit has recently slashed 25% of its workforce, which would surely not be a necessary move if General Electric's management believed that the unit would recover to pre-crisis levels in the near term. The following statement by the unit's CEO David Joyce is quite telling: "The deep contraction of commercial aviation is unprecedented ... Unfortunately, more [cost-cutting] is required as we scale the business to [reality]."

General Electric's problems don't end there, however, as the company also continues to face issues with its balance sheet. The sale of its biotechnology business to Danaher (DHR) provided the company with some cash that could be used to reduce debt, but on the other hand this sale further weakened General Electric's ability to generate profits and cash flows. The cash flow outlook for 2020 is looking quite worrisome, as management is forecasting a $4 billion free cash flow shortfall for the current quarter alone. For a company like General Electric, which has already had quite weak cash generation power before the current crisis, and that has a highly levered balance sheet on top of that, this is quite a problem.

Data by YCharts

General Electric has total net long-term liabilities of $65 billion right now, while it generated less than 5% of that, or just $2.7 billion, in free cash flows over the last year. With a Q2 cash shortfall of $4 billion, General Electric's free cash flow during the current year will easily be negative, even when we assume that Q3 and Q4 will see no impact from the coronavirus pandemic, which seems highly unlikely.

To sum up, we can say that General Electric's pre-existing problems, such as weak margins, low backlog, weak cash generation, etc. all will get worse during the current crisis. On top of that, its best business by far, the aircraft engine unit, is facing the biggest headwind in its existence. The fact that General Electric's shares have not participated in the broad market recovery over the last two months is thus easily explained by the market's realistic views about General Electric's future.

So, What To Invest In?

Industrial companies are not a bad investment per se, and those that seek exposure to all large industries may still want a stock from that space. Siemens is a viable alternative, we believe, but among other large-cap industrial corporations, there is a range of candidates as well:

Data by YCharts

Based on a fundamental screen that accounts for indebtedness (debt to EBITDA) and profitability (gross margins), Honeywell, 3M, and Illinois Tool Works (ITW) all look like more attractive investments compared to General Electric.

Based on the dividend yields that investors receive from their investments, and based on cash flow multiples investors have to pay, all three of these companies, once again, look more impressive than General Electric. This is not a deep dive into General Electric's peers, but we believe it is opportune for investors to take a look into these higher-quality companies rather than buying General Electric's shares right here.

Takeaway

General Electric once was a beloved company, and it still is a household name. Unfortunately, mismanagement and disastrous capital allocation decisions have hurt the company a lot. During the current pandemic-caused crisis, additional problems were created, primarily for General Electric's aircraft engine business. This is not management's fault, but it nevertheless hurts investors and the company's prospects.

Siemens was a better investment compared to General Electric in the past, and we believe that this could still be true. Other industrial machinery companies such as Honeywell or 3M look more attractive, too.

It should be noted that General Electric's management is trying to turn the ship around, and based on a price to sales multiple of just 0.6, General Electric's shares do not look expensive. But until management has achieved higher levels of profitability and cash flows, all those revenues do unfortunately not have any value for shareholders.

We believe that General Electric's shares should be avoided, as peers provide better business models, stronger fundamentals, and more potential for sleep-well-at-night-investing. Short-term oriented traders or those gambling on a successful turnaround may want to choose General Electric, but we do not see this as an overly attractive proposal right here.

Author's note: If you liked this article and want to read more from me, you can click the "Follow" button at the top of the page, or you can also press the "Like this article" button below.

Analyst’s 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.

Comments

[Old Wizard]

By the way Hangloose by your last comment I know you didn’t read my post. I clearly stated my break even price is 4.5 dollars per share.on GE. Also you should admit that you didn’t have anywhere in your comments a black swan event as the reason for the stock getting to 5. You are not the only one who commented on GE difficulties prior to the coronavirus. ,if you check my difference of opinion with Mike Slattery in SA comments going back to 2015, you will find my criticisms of Immelt’s deciisios there. Further, you will find that the choice of Flattery met with a lot of skepticism.on my part. The mismanagement of the company was palpable. I don’t recall your comments that early. I already have said I should have sold long before GE got in the difficulty it had previously, but I didn’t. It doesn’t mean that in general I am not good on most of my investments and am really not negative on my GE holdings

[Old Wizard]

Philbert, you do the same thing that many do these days. When someone makes a statement that is correct that you don’t like, you raise a whole bunch of other points that may or may not be factual but won’t acknowledge the accuracy of the original statement. Fact is that
Hangloose’s prediction of 5/ share was not predicated on a black swan event happening. That was my original point. Now so much of your ranting is beside my point, You are incorrect, in that the Chinese have stolen GE’s large engine design. You have a point that GE has a joint venture in China to build older smaller engines. If you check my comments in the past you will find that I was very negative about that joint venture, for the very reason that China would eventually try to steal the technology and announced a big investment of people and money to create a large jet engine domestic industry. I also was negative in SA comments about selling their transportation. and large appliance businesses, GE is no longer a big diversified company. They are completely out of the consumer product businesses after selling their lighting business. I believe now and in the past that that set of decisions were a mistake and initiated by Immelt and continued by his successors. I believe Culp has done so almost out of necessity. By the way the large appliance business was sold to a Chinese company who negotiated the retention of the GE logo. Most people I know believe it is still a GE company and buy those products because they believe it is GE. Service people I have had come in to service problems with the Samsung appliances we now have, , told us we wouldn’t have this problem if it was a GE appliance. Too bad, Immelt and his merry men didn’t have that understanding of the brand reputation and find a way to keep the business.

[Old Wizard]

Philbert , , what is your point? Do you know of any other time in history where the government shut down the economy on a knife edge in a matter of two weeks. This while having a roaring economy with record low unemployment and the prospects of much more equitable trade deals. Air travel was booming and went from over 90% of capacity occupancy to less than 10% in the blinking of an eye. Are you asserting that you saw it coming or that it should have been predicted and accommodated with no impact on one’s primary business if it is making and servicing aircraft engines? If you are pointing out that the state of GE was that they had no mountain of cash on the balance sheet to rely on, that is not a basis for predicting the economic carnage of the pandemic. Of course if it were possible to export the manufacture of aucraft engines to China they might have more cash in the bank. Not as much as Apple but more than they had prior to the crash. Again my point was and I will restate it, the stock would not have recently approached 5/ share if the pandemic didn’t occur and that possibility was not predicted in Hangloose’s reasoning..

[User 50735431]

@Old Wizard

"Do you know of any other time in history where the government shut down the economy on a knife edge in a matter of two weeks."

Not only that, I know of no other time in history where it was required that the HEALTHY be quarantined. Nothing suspicious about that, at all. Here in our town, the stench is unbearable with all the piles of bodies strewn around the streets.

"This while having a roaring economy with record low unemployment and the prospects of much more equitable trade deals."

Roaring Economy? Record Low Unemployment? Yeah, people supporting themselves on 2 or 3 part time service jobs is a roaring economy alright. I suggest you start taking a look at http://www.shadowstats.com/ .

"Air travel was booming and went from over 90% of capacity occupancy to less than 10% in the blinking of an eye."

GE sold itself as a diversified conglomerate, well positioned & hedged to weather the storms of the business cycle. That was before they started selling all of their profitable shit to pay for the bad bets at Capital. Perhaps if it had been a well run company, Aviation wouldn't have been their only saving grace.

"Of course if it were possible to export the manufacture of aucraft engines to China they might have more cash in the bank."

Why would China want to buy engines from GE? The Chinese H1Bs working at Aviation already stole the design tech years ago . . . love that diversity.

"Again my point was and I will restate it, the stock would not have recently approached 5/ share if the pandemic didn’t occur and that possibility was not predicted in Hangloose’s reasoning"

But the Scamdemic did happen, and they have happened throughout history. It's called a Black Swan, and poor little 120+ year old GE has nothing to fall back upon, other than The Fed buying its junk bonds with our looted taxpayer money.

[User 48291705]

As usual, you don't bother to read my posts back at you Wizard. I suggest you read it again, as I don't feel like going through it all again.

GE was in trouble long before COVID, and if GE was doing so great, your buddy Culp wouldn't be hawking off what he can to save GE.

Feel free to turn a blind eye and make believe GE was fine well before COVID. No problem for me, as I don't own the stock. You bought it much higher like you and some of your long pals, and will have to cross your fingers to get back in the green someday.

🤙😷

[Jonathan Weber]

@hangloose Hawaii

I agree, troubles began before COVID

[Old Wizard]

You are deflecting my point. . Had it not been for the Coronavirus pandemic GE would not had seen five and change recently. Nobody is contesting that GE has had many problems, but they were being corrected by Culp. Whether the stock was ever going to get to the thirties again was arguable.
Now you have no idea what my investment holdings are, I guess you might be critical of my Regeneron, Apple, Facebook dollar tree and Home Depot stock as well. Or the nucor stock I bought in the over forty years ago that i’ve held too long. Might you assume too much before your conclusions about others and their investments. My holding of GE at break even of about 4.5/ share probably is ascribable to the loyalty I had as an employee of over 30 years and it would have been much better to have sold it before Immelt ruined the company, but I didn’t. That still diesn’t bear on your recent ability to predict the share price. GE stock is iirrevocably tied to Boeing’s future and that is tied to commercial airline futures. That is reality and all other factors are secondary.

[User 50735431]

@Old Wizard

"Had it not been for the Coronavirus pandemic GE would not had seen five and change recently."

Your point being, that in GE's 120+ year history with the best and brightest, they'd never seen a 'Swan of Color', and neither knew how to plan for its coming, nor knew the proper load to bring it down?

That being the case, they don't actually seem that smart.

. . . or maybe it's just cuz' they can't rollover $500 billion in the paper market any longer, eh?

[Old Wizard]

Hangloose, be honest. You didn’t predict the pandemic and you must realize that had it not occurred, GE would not have gone to the 5 dollar and change number. The current price of the stock reflects the big drop out of commercial air travel and the sudden reduction of demand for new planes and maintenance. In mathematics we would represent both of those as a Dirac function. In layman’s terms a big change in amplitude at an infinitesimal change in time. The issue now for GE is can they contend with the sudden decrease in demand for the segment of their business that was the biggest and most cash positive.until air travel restores to pre pandemic levels. Pension and LTC issues are secondary. In a maudlin sort a way the absolutely abhorrent treatment of older people in long term care facilities by most of the nation’s governors has probably reduced GE’s potential shortfalls in these areas.

[User 50735431]

@Old Wizard

"Pension and LTC issues are secondary," [since they never really intend to honor those commitments anyway.]

FIFY

[User 48291705]

C'mon Old Wizard, I have been honest. GE for the past 4 years have been a total cluster****. Dividend slashes, new CEO's, accounting resets and fines, huge DEBT issue to overcome, hawking assets and taking losses on those sales, pink slipping thousands, pension problems that are ongoing, the list just goes on.

The stock over 4 years has gone from $30 to $5.48. All during a hyped bull market. GE has been in trouble long before COVID. Am I lying Wizard??

Now longs like you need to be honest with yourself. Your the one hanging onto hope and a prayer. Time to get honest with yourself, and realize there are far better stocks in the industrial side to invest in.

The globe has been in a recession long before COVID, and now it has reached the USA. So many companies piling on DEBT to try to get through the pandemic and recession. Sure it's "cheaper" DEBT, but still DEBT that will have to be repaid. Companies like GE that will have far less revenues especially in a recession will have even tougher times moving forward.

Eventually P/E's will matter, and newbies that are betting on the hype that GE should be "valued" in a P/E range of 70 will learn the hard lesson of playing with fire.

Don't get mad at my posts Wizard that I can see that GE isn't even worth a $2 stock.

C ya @$5, then watch out below

🤙😷

[User 48291705]

Well let's see if SA allows my post.

The author spells out the issues GE faces, but omits LTC and whopper pension problems for GE as well.

I see so many newbies here chiming in about buying at such and such prices, thinking GE is going to double or triple bag for them. Obviously they are buying on hope and hype, and will take it on the chin by being so rah rah.

GE has been a house of cards and will continue in a global recession. My 5 buck call was way before Tusa's, and it reached $5.48 for a low so far. IMO, GE doesn't warrant a $2 price for supposedly 11 cents in earnings for 2020. That would give GE a P/E of 18.18, which is still real pricey for a industrial barely able to pay a 4 cent divvy in a global recession.

So, you newbies set up stop loss sell orders yet? With todays market action, plus second quarter report card days, you can expect a lot more carnage in this overhyped market/casino.

The author explains the pitfalls very well in taking a spin with GE. GE has turned into a boiler room play, and Culp and the few longs here that have been cheerleaders on this board, need all the fresh meat they can get to buy into the GE fantasy.

No doubt, you can expect to see Culp being forced to hawk another jewel, and this GE will continue to shrink and pink slip even more employees. Sad to see, but that's what happens when you have a BOD dishing out Millions to make CEO's and top management richer. The buybacks were a total scam on shareholders and employees and greed has run amok in GE for years. Prime example is promising to dish out up to $300 Million to a CEO to just raise the stock up. What a total slap in the face to GE lifer employees that are getting pink slipped, and their pensions frozen.

If you want to "invest" in a greedy GE, then have at it. No way will I support such greed.

I am not even going into detail about the fudge's of GE accounting, which is another total ball of financial wax.

Moral of my post, is follow the authors advice and invest in well run profitable companies that can pay decent dividends or chase greedy management with false Hope's and dreams of double or triple bagging on junk.

C ya @$5, then $2

🤙😷

[Jonathan Weber]

@hangloose Hawaii

Yes, LTC and pension liabilities are additional issues for GE

[Old Wizard]

If GE starts a stock repurchase program in the foreseeable future, it will convince me to sell the stock. Immelt’s decision to commit 40B or more to that action in 2015,16,17 was among the worst of many bad decisions he made that put the company in jeopardy. If there is spare cash in the coffers , there are other more productive uses to which it should be employed.. I generally don’t favor stock buy backs unless a company has so much cash on the balance sheet that it has exhausted all other productive uses of the cash. Even in these cases, I favor giving the money to stockholders in extra dividends.

[Jonathan Weber]

@Old Wizard

Yes, indeed very bad use of capital. They will not have enough FCF to seriously do any buybacks

[Apple Eye]

I think they can increase dividend to .10 to 12 cents in the 4th quarter and start a share repurchase program.

[Jonathan Weber]

@Apple Eye

Why would they? They won't have positive FCF this year

[G1949]

I’m even on GE now. I dollar cost averaged when it hit 6. Poorly run company but if jet engine business picks up this does have a lot of potential upside. Definitely one of my dogs

[Jonathan Weber]

@Gio949

Glad you were able to balance out the losses!

[What Privilege]

I did too (with a big chunk at $5.50) but now thinking seriously about moving on... that capitol can be used elsewhere. I hated the idea of selling at a loss, but now that I'm close to even it will be a lot easier.

[JDoe20]

@YooogeDisgrace - biggest cost of GE over the last few years is the opportunity cost. Lots of good stocks were paying real dividends and appreciating nicely. Sitting in the same dog for years costs you money!

[locum2]

GE is a cash incinerator. It’s selling cash generating businesses to fund various liabilities. With every business sale, it’s shrinking. Many of the businesses sold, the buyers get the assets and GE retains the liabilities.

[User 50735431]

@locum2

"Many of the businesses sold, the buyers get the assets and GE retains the liabilities."

GE Motto: We lose money on every sale, but we make it up in volume!

[Jonathan Weber]

@locum2

Agree, one of the issues here. They have to liquidate strong assets.

[cost.basis]

I am around 9. I wonder if I should cut my loses. I did not have the conviction to average down on this GE mess. Not sure what to do. May aviation will revamp itself soon.

[mk1992]

$5.50 to $8 in less than a week, glad I didn't listen to you huh?

[Jonathan Weber]

@mk1992

More like up 1.4% on the one day since the article was released, while broad markets had twice the gain.

[Sighcopath]

@

[User 50735431]

@mk1992

"$5.50 to $8 in less than a week, glad I didn't listen to you huh?"

Just keep your hands in the car at all times, the next one is a doozy.

[Chesternut]

What about GE EE's who get .50 on the dollar to buy GE stock with no commission in the 401K RSP ( along with a full pension including Med benefits in certain cases) and get dividends now if they want them?
What should they do? I'll tell you what.....cry all the way to the bank!

[Jonathan Weber]

@Chesternut

This was from the perspective of an average investor without these benefits

[Old Wizard]

Contrary to the doom sayers, airline traffic will increase much faster than most think. The GE engine business is key to its stock performance, and as you have indicated, the lion’s share of profit in that business is made in servicevand maintenance. GE’s logistic and real time system that supports this end of the business is the best in the world, Look to a faster recovery there which has no doubt been drastically affected by the pandemic on air travel. In the meantime, the B52 reengining government procurement could fill in the near term, should GE be successful in the competition.

[D. Rider]

The number of retirees (GE and otherwise) and workers overall---conservative estimate is its in the 7 figures in terms of number of people---that have been and were decimated in their portfolios over the past 15 years, especially with the Street telling this group to "not worry" and to "keep buying more GE because, well, it is GE for crying out loud!.." almost bordered on the criminal. What Jonathan hits the nail on the head here in his article is with these three words: ".... lacking the backlog..." That sums up everything about GE at the moment, for when you dig thru their recent filings, you cannot help but be struck by this. Almost any reasonably well-run industrial/manufacturer is a better play until that simple fact (lacking the backlog) can make the turn. Culp is trying mightily, but this ship started sinking, and it all began with Welch and financial shenanigans he began pulling with GE in the mid-to-late 90s. But when the backlog turns, and in whatever form GE is still in (most likely further broken apart), that will be the time to step in. Nice article, Jonathan!

[Jonathan Weber]

@D. Rider

Thanks for your comment! Glad you liked reading it!

[Sighcopath]

My back of the envelope math indicated that not only did GE sell part of the health care business it sold the really profitable parts. Going to be interesting to see if the envelope information was right. If I remember correctly it looked like the margins in HC should drop about 4% to 5%. And just when GE could have used those extra percentage points on the margin. No position in GE for almost 2 years now. Any one know if the HC margins are down compared to before the sale or is that a surprise for next quarter?

[Jonathan Weber]

@Sighcopath

true, they are selling some prime assets in order to pay down debt, which will hurt the long term outlook.

[bengalesq]

Really well presented article.

[Jonathan Weber]

@bengalesq

Thank you very much!

[Jorel Boston]

I can't even read the article. The Title is gangsta enough lol. I've always been curious about dropping a few stacks in GE, but every investor says stay away

[Jonathan Weber]

@Jorel Boston

Why can't you read the article? You might like it

[DimaP123]

I don't know why you guys don't like GE, but it is awesome stock to trade (not buy and hold)! It has HUGE volume, just trade smaller ranges with bigger volumes.

[Jonathan Weber]

@DimaP123

It has solid properties for trading, but that's not what I like, and I think many other also prefer long-term investments

[DimaP123]

Yeah, I already figured that out... Here we have more long term investors, not traders.

[Knkltnf]

Jim Cramer not from another word when he said GE is coming back

[Old Wizard]

If Boeing has succeededv in preserving Max orders, does that signal better prospects for
GE?

[Jonathan Weber]

@Old Wizard

GE will benefit when BA does well. Think this will not happen in the near term, but in the long run.

[G1949]

I agree. Eventually jet engines will recover and people will fly again. I’m in ge pretty low I’ll just hold. I think GE is a perfect example of trying to do too many things. I’ve always felt it’s better to specialize in only a couple sectors

[Hachilio]

GE is a loser. Totally. That makes it a value stock, and I like to speculate on deep discounts. IN long at 6$/share!

[Jonathan Weber]

@Hachilio

Speculation is the right word I think -- could go right, but not at all guaranteed. Good luck!