For the most part, General Electric (NYSE:GE) has been trading pretty well over the last several months. GE stock hit a new 52-week high on Mar. 9, topping at $14.42. Since then, though, the ride has been a little bumpy.
For example, the stock actually closed lower on Mar. 9, despite hitting that high. That marked the first of three straight daily declines, where shares shed 17.1% from peak to trough. While the stock has recouped some of those losses, investors would be better off taking profit into the rally rather than increasing their position.
While the situation is indeed improving at General Electric, let’s not mistake it for a good situation. The company still has numerous issues and it will take a long time to get it back on the right path.
GE Stock and the Capital Aviation Deal
What caused shares of GE stock to fall so hard, so fast? GE agreed to combine its Capital Aviation Services (GECAS) business. While the deal may have flown under the radar to many, it’s no small combination.
The deal is being valued at $30 billion and will leave GE with 46% of the combined entity. GECAS is currently part of the GE Capital business, which the company has been winding down over the years.
While this move hasn’t exactly been cheered by Wall Street thus far, it will be used to reduce its overall debt. According to CNBC, the flip side is, “S&P Global Ratings said it expects to lower GE’s credit rating because ‘debt leverage will be higher than previously expected due to the consolidation of GE Capital financials.’”
GE Still Has Struggles
Regardless of the deal, though, General Electric is a shell of its former self. We’re talking about a company that was a top industrial player in the world at one point. GE stock was a blue-chip name all the way through, a dependable earner with an attractive dividend.
Of course, all of that brand power and recognition has been lost over the years. Shares are down 31% over the last decade and, absent the dividend, the stock is up a paltry 5% or so over the past 25 years.
In the most recent quarter, three of GE’s business units were profitable. That’s a big improvement from four out of the five being unprofitable earlier in the year. Further, management says industrial free cash flow should be between $2.5 billion and $4.5 billion in 2021.
If that’s the case, that’s a big improvement versus 2020. GE’s free cash flow — or should we say lack of free cash flow — has been a huge catalyst behind it’s underperformance.
However, aviation and healthcare remain a concern. These two units are General Electric’s largest businesses. So, if they struggle, GE stock may struggle as well.
Although the aviation space is set to rebound in 2021, that doesn’t mean the airlines are going to be in a position to aggressively increase their fleets. Not only will passenger volume still be low, but global airlines are surely set to recover slower than U.S. carriers given the progress of the vaccinations.
Of course, a slow recovery is better than nothing, but it may not be as robust as some investors think. At least not right away. That said, General Electric is better off than it was six months ago. For that, the bulls should have some relief.
Why Sell GE Stock?
All that said, though, just because a company is turning things around and improving from where it was six to 12 months ago doesn’t mean it’s a good company. Admittedly, General Electric is on the mend. But that doesn’t make it a must-buy stock.
Take 2021 for example. How many companies and industries are set for an absolute boon? There will be a huge recovery in business this year and there will be hundreds of winners.
General Electric, though? Analysts expect a decline in sales. Further, while earnings of 25 cents a share is an improvement, is that really anything to write home about?
In fact, that leaves GE stock trading at 53.9 times this year’s earnings. This isn’t a tech stock with robust growth in secular trends, even though it’s being valued like one. Worse, in 2022, analysts predict revenue growth of just 6.4%. While they expect earnings to double to 51 cents a share, that still leaves GE trading at roughly 26 times 2022 earnings estimates.
And really, how long can GE keep up that kind of growth anyway? It’s one thing to free up capital and shed underperforming assets. That creates short-term value. But it’s not sustainable. An athlete can only shed so much weight before they need to start putting on muscle. For GE, it’s a similar concept.
Perhaps GE stock has more upside in 2021 — particularly if the business performs well. However, there are simply better options out there, especially after the latest dip.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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