General Electric‘s (GE) bold turnaround is winning over more believers on Wall Street, as the industrial giant tries to strengthen core businesses, slashes debt and reduces risk — and as the Boeing (BA) 737 Max returns to service. Is GE stock a buy right now?
The American manufacturing icon surged in 2019 after a brutal couple of years for GE earnings. After a strong kickoff in 2020, shares slumped to their lowest level since the waning days of the financial crisis. The coronavirus pandemic hit GE’s flagship aviation and power units. But health care is holding up reasonably well and renewable energy is growing.
Should investors consider GE stock? To answer that question, investors should look at General Electric’s fundamentals and technicals.
GE Stock Technical Analysis
GE stock topped an 8.67 buy point on Nov. 9.
The cup-shaped base formed below the 200-day line, which was not a great sign. But shares of the industrial giant continue to act well after the breakout, currently above a rising 50-day line. They are extended far beyond the 5% chase zone, according to MarketSmith chart analysis. That means they’re not in buy range.
And now, the 200-day average is starting to turn up after a long downtrend, a positive for GE stock.
General Electric has almost doubled from the May low of 5.48. It hit a decade-plus low in May as the pandemic crushed global air travel.
Arguably, GE stock is forming a handle on a larger consolidation going back to early February. But the pattern is 59% deep, with most of the base forming below the 200-day. Ideally, GE would turn that “handle” into a stand-alone base.
The relative strength line has been picking up significantly in the last three months, but within a multiyear downtrend, according to MarketSmith chart analysis. The RS line gauges GE stock’s strength against all stocks in the S&P 500. It is the blue line in the chart shown.
After surprise GE earnings in late October, several key IBD ratings improved significantly for General Electric. Its IBD Composite Rating is 38 out of 99. The rating combines key technical and fundamental metrics in a single score.
General Electric owns an RS Rating of 80, meaning it has outperformed 80% of all stocks over the past year. The Accumulation/Distribution Rating is an A, on a scale of A+ to a worst E. It’s a sign of strong institutional buying of GE shares over the past 13 weeks.
GE remains a popular stock with strong institutional support: 1,703 funds owned GE shares as of September, though that was down from 1,731 in June.
GE Earnings And Fundamental Analysis
On key earnings and sales metrics, GE stock earns a poor EPS Rating of 12 out of 99, and an SMR Rating of C, on a scale of A+ (best) to E (worst). The EPS Rating compares a company’s earnings per share growth vs. all other stocks, and its SMR Rating reflects sales growth, profit margins and return on equity.
GE stock has a 7.6% pretax margin, the IBD Stock Checkup tool shows. General Electric’s annual ROE is 20.6%, above the minimum 17% or higher that investors would want to see.
On Oct. 29, the industrial giant posted a 60% EPS drop for the third quarter as sales sank 17%. But GE defied expectations for a loss and Wall Street cheered signs that GE’s transformation is accelerating despite the pandemic hit.
General Electric also generated $514 million in industrial free cash flow (FCF) in Q3, after bleeding $4.3 billion in the first half of 2020. The measure is closely watched as a sign of the health of GE’s operations and its ability to pay down debts.
General Electric expects to deliver $2.5 billion in industrial FCF in Q4 and to turn positive for full-year 2021.
When GE next reports, Wall Street expects General Electric earnings of 8 cents per share, down 62%, according to Zacks Investment Research. Revenue is seen shrinking 20% to $21.11 billion.
Analysts forecast GE earnings of 4 cents per share in all of 2020, down 94%, and a rebound to 30 cents per share in 2021. That would still be below 65 cents in 2019. Bear in mind that all earnings estimates should be taken with a pinch of salt in the coronavirus market.
Eight analysts on Wall Street rate GE stock a buy, four have a hold and none has a sell, per Zacks.
Headwinds For GE Aviation
Aviation is GE’s biggest segment by revenue — but, of late, a drag on GE earnings.
The protracted Boeing and coronavirus crises battered GE Aviation on the commercial side, though the defense side remains strong.
GE makes jet engines for plane makers, runs a lucrative aftermarket business for engine repair and maintenance, and leases aircraft to airline customers. A GE joint venture makes engines for the troubled 737 Max jet.
Its commercial aviation business took blows from every direction, after the Boeing 737 Max jet was grounded after two fatal flights, while airlines parked planes and delayed or canceled orders due to the pandemic. Meanwhile, 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.
But in December, the Boeing 737 Max returned to service and deliveries resumed, after it was certified to fly again. Some airlines are starting to order the 737 Max again. GE stock built on the fourth-quarter rally.
General Electric Restructuring
CEO Larry Culp’s top priority is improving General Electric’s financial position. He also seeks to strengthen five core businesses as part of a multibillion-dollar restructuring plan.
Those units include aviation, power, heath care, renewable energy and financial services (which the aircraft leasing unit is part of). In Q3, despite the pandemic, each of GE’s industrial businesses showed improvement in revenue growth and operating margins quarter over quarter.
More positive developments have followed.
In November, GE’s health care unit struck a multiyear pact with cancer treatment company GenesisCare. It also got a boost from rising hopes for a coronavirus vaccine.
In December, GE’s renewable energy unit announced an agreement to supply offshore wind turbines for what will become the world’s largest wind farm, in the U.K.
Also this month, GE announced a settlement with the SEC over an investigation tied to its power and legacy insurance business. GE neither admitted nor denied the SEC findings, while agreeing to pay a $200 million penalty. That eased a legal overhang on GE stock.
Meanwhile, GE has achieved 75% of a target to cut costs by $2 billion this year. It reduced debt by $2.6 billion in Q3 and expects to slash debt by $16.6 billion in all of 2020.
Still, the health of GE’s biggest units is being watched.
A recovery for global air travel and the Boeing 737 Max remains a big uncertainty for GE Aviation. And GE Power, which makes gas turbines, has seen the market shift to renewable energy.
Under Culp, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, in 2017, was only GE’s second since the Great Depression.
The dividend cuts rattled investors, many of whom prized GE stock for its long and reliable history of paying dividends. GE stock’s current 4-cent annual payout offers a yield of 0.6%.
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 rival. Siemens Energy competes with GE in power. It emerged in September after Siemens (SIEGY) spun off its gas turbine business, seen as low margin. Japan’s Mitsubishi Hitachi is another big power rival.
Is GE Stock A Buy Now?
General Electric has taken investors on a wild ride in a 2020, bookended with big rallies.
The Boeing and coronavirus headwinds to key businesses and GE earnings appear to be easing. The conglomerate also has made big strides in improving its financial situation, while reducing legal risk.
Many analysts on Wall Street see GE’s transformation accelerating under current leadership. But others remain on the sidelines. General Electric also does not belong to a leading industry group.
From a technical perspective, GE stock continues to act well after its latest breakout. An improving RS line backs the rally. That reflects hopes for improving fundaments with the Boeing 737 Max flying again and the expectation of a post-pandemic recovery in travel and the broader economy.
But shares are not in a buy zone. Investors also should look for stocks with strong fundamentals that are breaking out of proper bases. General Electric does not have those qualities.
Bottom line: GE stock is not a buy right now. But investors who believe General Electric will eventually turn itself around should check back for updates on a new entry.
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