General Electric Shares Haven’t Bottomed, So Steer Clear

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No news is good news for General Electric (NYSE:GE) investors these days.

The industrial conglomerate, which is facing one of the most difficult times in its 126-year history, was given another thumbs down this week when UBS cut the price target its shares, citing a worsening demand outlook for its power unit, a business that’s central to the company’s turnaround plan.

General Electric Shares Haven’t Bottomed, So Steer Clear

GE 1-Year Chart

“Power market improvement is needed to make a meaningful impact on earnings, but we see signs the market is deteriorating,” analyst Steven Winoker said in a note to clients on Aug. 5. He cut the share price target to $13 from $16. Winoker added in the note:

“While cost-out remains a primary focus for the business, the end markets are far from cooperative with regard to pricing, demand and competition…And if anything, requires even more aggressive cost reductions, forcing GE into a vicious cycle.”

There is no dearth of bearish forecasts for GE, which is in the middle of its most drastic corporate shakeup in recent history. As part of its broader restructuring plan to restore the company’s financial health, GE plans to spin off its healthcare business and divest its stake in oil-services firm Baker Hughes, effectively breaking up the company. The spinoff is expected to be completed in the next 12 to 18 months.

Once these deals are done, the leaner GE will be left with jet engines, power plants and renewable energy units, which GE’s new CEO John Flannery hopes will instill some life in the stock that has lost more than half its value in the past year. Shareholders have their dividend slashed to half, only the second cut since the Great Depression.

Still Room For Shares To Drop

At around $12.50 a share, most of the bad news is already baked into the stock and this could be a right moment for contrarian investors to initiate a bet on the company’s turnaround.

There is a good chance that a contrarian position might pay handsomely to risk-takers who have a little longer time horizon. But the time for bottom-fishing hasn’t arrived.

The biggest uncertainty that’s lurking is the possibility of another dividend cut. The company’s latest cash position suggests that the second dividend cut will be much steeper than the one announced in November, when GE reduced the payout amount by half to $0.12.

GE’s second-quarter earnings showed in July the embattled conglomerate is still struggling to meet its cash goals. GE reported only $258 million in adjusted industrial free cash flow, including Baker Hughes dividends for the quarter. That was about $100 million less than the same period a year ago. That puts its first-half 2018 free cash flow at negative $1.4 billion, forcing the company to cut its full-year cash flow target to $6 billion.

Bottom Line

GE’s struggle to revive demand for its gas turbines and its aviation business doesn’t help to make a bull case for its beaten-down stock. This weakness shows that there are a lot of risks to Flannery’s turnaround plan and it might mean more pain for GE’s shareholders. For new investors, it’s better to stay on the sidelines and wait for the right moment.

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