General Electric (NYSE:GE) just wrapped up a year investors won’t forget. The maker of lightbulbs, power turbines and aircraft engines lost more than half of its market value in 2018 on concerns that the company wouldn’t survive.
To avoid its demise, this once-venerable giant almost eliminated its legendary rock-solid dividend, changed its CEO and started a massive asset sale program.
A very powerful rally in the first six weeks of this year suggests that some investors have become a little more hopeful about its turnaround prospects.
General Electric (GE) – 1-Year Chart
GE shares have rallied more than 30% this year, rebounding from $6.66 per share, the lowest they’d been since the financial crisis of 2008. Is this surge a sign that the worst is over for this embattled company or is it just a head fake?
Based on the company’s turnaround efforts since new CEO Larry Culp took over in October, it’s hard to answer this question. There was no new bombshell in the company’s latest earnings report, unlike Q3 when GE announced a $22 billion goodwill impairment charge in its power division.
But at the same time, Culp didn’t provide any guidance for 2019, suggesting that his efforts cleaning up the mess at GE is still very much a work in progress and he is still figuring out what it will take to right the ship.
Visibility Is Hazy With Power Unit Still Bleeding
One of the biggest challenges for Culp is how to improve GE’s cash flow at a time when its flagship power business is unravelling. The Q4 earnings included bigger-than-expected shortfalls at the power unit, which posted an $872 million operating loss and a $2.7 billion cash burn, while GE Capital had a $177 million loss.
Culp forecasted industrial organic sales up low- to mid-single digits this year, with free cash flow under pressure, but strengthening in 2020 and 2021.
This lack of visibility has been reflected in the company’s credit default swaps. The cost to protect GE’s debt against default for five years has nearly tripled. Companies in such a situation generally use a tested formula investors and credit rating agencies love: cut costs, sell assets and reduce debt load.
Culp is using the same approach, but in the case of GE it’s not easy to get the right results. GE has about $43 billion in obligations, according to Bloomberg, that could be met if the company sells some of its cash-generating assets, such as its GECAS jet-lessor unit.
But throwing away its prized assets means that GE is left with trash and a potential to trigger additional writedowns. JPMorgan’s Steve Tusa, who has been the most accurate analyst on GE stock, doesn’t think the company is out of the woods, saying the industrial giant might need to raise $25 billion of equity to survive.
As we highlighted in our November article, GE has probably seen the worst of its current crisis and the next stage will show some serious restructuring efforts under new management, gradually restoring investor confidence.
The Q4 earnings show there are still many powerful headwinds that this conglomerate is facing and it will require some time to resolve the company’s complex problems. We still hold our view that buying GE stock under $10 could prove to be a good turnaround bet for risk-takers, but, at the same time, they should take a long-term approach and be ready for lots of bumps in the road.