As I’ve said before, I truly hope General Electric (NYSE:GE) succeeds in its comeback. GE has been a great American company for decades, and it still has a massive workforce. But hope isn’t a reason to buy, or to recommend, GE stock.
Admittedly, hope has driven General Electric’s stock higher over the last seven months. In fact, the stock has doubled. Bulls see a “return to normalcy” boosting the aviation business. GE is looking to get leaner. The Renewable Energy business perhaps provides some promise.
After the rally, there are two problems with the thesis. First, to some extent, success is now priced in. GE has added roughly $60 billion in market capitalization just since October.
The second problem is that success is far from guaranteed. In fact, it still looks like GE’s long-running problems haven’t been fixed. The big risk to GE stock is that these problems will never be fixed.
A Slimmer GE
For years now, GE has been getting smaller.
GE Oil & Gas was moved into a joint venture. Ever since, GE has been steadily divesting its stake, which includes selling a decent chunk at the lows last year.
GE Transportation was sold in 2019. GE Lighting, which by the end had become a tiny contributor to profits, went out the door last year. Go back to 2016 and the company exited the appliances business as well (the GE brand still exists, but in the hands of a different company).
Even the businesses that GE still owns are getting smaller.
In Power, largely the legacy of the disastrous acquisition of Alstom back in 2015, GE has exited its water and Industrial Solutions businesses. GE Biopharma, formerly part of the Healthcare segment, was sold to GE chief executive officer Larry Culp’s former employer early last year.
This year, GE announced plans to merge its aircraft leasing business, GE Capital Aviation Services, a key part of GE Capital, with another firm.
These divestitures are part of a strategy that goes back to before Culp’s arrival in late 2018. GE, thanks to weak free cash flow and significant liabilities at GE Capital, simply had to fix its balance sheet.
It has done so. After the GECAS deal closes, GE will have reduced its debt by more than $70 billion in less than three years.
What Now?
But, of course, there’s a cost to all of these sales. A smaller GE is a less profitable GE, even with lower interest expense required to service its debt load.
That aside, there’s a real question as to how attractive this business really is. It goes without saying that the GE of today is not the GE of old. The question some investors might not be asking is: what is the GE of today?
It’s not a bad company, certainly. But it’s not a great one, either.
The Healthcare business is solid, yes. Renewable Energy is intriguing, as GE has built out a nice business in wind turbines. That segment has been unprofitable the last two years, however, with revenue growing just 2% in 2020. Obviously, the pandemic played a role, but the business needs to improve its results.
Aviation has taken a hit from the pandemic, but may have been overearning before that. And it may well take years to return to pre-2020 demand. Shares of the two major aircraft manufacturers suggest as much: they are down 22% and 30%, respectively, since the beginning of last year.
GE Capital has been shrunk to the point where it’s no longer going to be broken out as an operating segment. Power, meanwhile, is a mess and unlikely to get fixed as the world moves away from dirty energy.
Overall, this is not an exciting collection of businesses. Nor is it a group that seems to fit all that well together anymore.
GE is what it is now because it got too big and had to shrink — not because management wanted to build a company that looks like this.
The Broader Problem for GE Stock
That gets to the core question here: Why are investors owning this company?
Whatever case can be made for GE stock can be made elsewhere, too.
Betting on GE Aviation on a return to normalcy in air travel? There are myriad better plays: manufacturers, travel websites, airlines, etc.
Like the Healthcare business? There are plenty of options in that sector to play the aging of the baby boomers in the U.S. and the rising access to medical care internationally.
Renewable Energy? There are plenty of pure plays.
There is an argument, perhaps, that the market is undervaluing either Culp’s ability to turn the company around and/or is mispricing the individual units. I’m rather skeptical toward both arguments. Culp did a wonderful job at his last stop, yes, but GE’s biggest problems are structural. Culp can’t fix the changing nature of end markets for GE Power, or bring aircraft demand roaring back to life.
As for the value of the individual units, it’s not as if they’re all that profitable. Long before the pandemic — in fact, long before Culp — GE struggled mightily to generate real, consistent free cash flow. Why, exactly, will that change when some of the best and fastest-growing businesses are gone?
It bears repeating: I’m rooting for GE. But with the stock up more than 100% from the lows and the market capitalization now over $100 billion, the investment case is just too thin. Investors can do better.
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 the article.
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