General Electric‘s (GE) turnaround is gaining traction amid signs of an aviation recovery and as the industrial giant continues to shrink its debt load. Is GE stock a buy right now?
For the first quarter, GE delivered a mixed earnings report, weighed down by its jet-engine unit. But Wall Street generally took the view that General Electric continues to transform into a simpler and stronger company.
GE Stock Technical Analysis
Shares are working on a 14.52 saucer-shaped buy point, according to MarketSmith chart analysis. As of July 13, GE stock sat roughly 13% below the entry, meaning it still has work to do to reach a proper buying zone. It’s also under the 50-day moving average, which has flattened out since May.
The relative strength line for GE stock is falling again. It rallied late last year and in early 2021 within a multi-year downtrend. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.
The industrial giant earns a poor IBD Composite Rating of 48 out of 99. The rating combines key technical and fundamental metrics in a single score.
General Electric owns an RS Rating of 83, meaning it has outperformed 83% of all stocks over the past year. The Accumulation/Distribution Rating is a D+, on a scale of A+ to a worst E. It’s a sign of moderate selling of GE shares over the past 13 weeks.
GE remains a popular stock with strong institutional support. As of June, 1,902 funds owned shares. GE stock shows three quarters of rising fund ownership, according to the IBD Stock Checkup tool.
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GE Earnings And Fundamental Analysis
On key earnings and sales metrics, GE stock earns an EPS Rating of 20 out of a best-possible 99, and an SMR Rating of D, on a scale of A+ (best) to E (worst). The EPS Rating compares a company’s earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.
In recent years, GE shed a biotech unit, its light bulb business, and a majority stake in its oil field services business. In March, GE announced a $30 billion deal merging its aircraft-leasing unit with AerCap (AER), with proceeds used to lower debt. The deal is set to close later this year or early next year.
General Electric also said it’s shrinking GE Capital further and announced a 1-for-8 reverse stock split, which takes effect July 30 after the market close.
In Q1, the industrial giant earned three cents a share, beating views. Sales fell 12% and missed. In GE’s business segments, revenue dropped 28% in aviation, 3% in power and 9% in health care. A nascent renewable energy segment grew revenue 2%.
In a seasonally weak Q1, GE’s industrial businesses burned $845 million in cash. Excluding the sale of a biopharma unit, GE grew industrial free cash flow by $1.7 billion year over year, highlighting progress in its turnaround strategy.
Analysts forecast GE earnings will rebound to 25 cents per share in all of 2021, up from just one cent a share in 2020. But that would still be below 2019 EPS of 65 cents. GE earnings are likely to more than double to 52 cents a share in 2022 as sales increase 6%, according to FactSet.
For 2021, GE set a free cash flow (FCF) target of $2.5 billion-$4.5 billion from industrial operations.
The FCF measure is closely watched as a sign of the health of GE’s operations and its ability to pay down debts. In 2020, GE generated $606 million in FCF, down 74%, but beating its own guidance. In fact, General Electric turned cash-positive a year ahead of schedule.
Out of 12 analysts on Wall Street, eight rate GE stock a buy and four have a hold, while none has a sell, according to TipRanks.com.
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Headwinds For GE Aviation Lifted
GE Aviation makes jet engines for plane makers, such as Boeing (BA) and Airbus (EADSY). It also runs a lucrative aftermarket business for engine repair and maintenance.
In 2020, Boeing halted production of the 737 Max jet for a few months after two fatal flights, which weighed on Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. 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.
Now the Boeing 737 Max is flying again and airlines are starting to order planes again. Meanwhile, the market continues to shift from wide-bodies to longer-range, narrow-body aircraft, benefiting General Electric. A GE joint venture dominates the market for narrow-body jet engines.
The jet-leasing deal with Ireland’s AerCap marks the biggest splash so far in CEO Culp’s turnaround campaign.
Proceeds from the deal should allow GE to cut debt by $30 billion and bring the total slashed since 2018 to $70 billion. Eventually, General Electric is expected to exit jet leasing altogether, though it’s taking a 46% stake in the combined company for now.
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Growing Momentum For GE Stock
CEO Culp’s top priority is improving General Electric’s financial position, while strengthening GE’s industrial core, as a maker of jet engines, gas turbines, wind turbines and hospital equipment.
In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.
The coronavirus pandemic hit GE Aviation — once its “crown jewel” — hardest. But GE touts recovery or continuing strength in other key business segments, such as gas power and health care.
Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.
On April 27, GE backed 2021 targets for revenue growth in the low single digits, and as much as $4.5 billion in free cash flow this year. GE continues to expect an aviation recovery in the second half of 2021.
Other core businesses aren’t out of the woods. For example, GE Power is stabilizing after a terrible slump in the market for coal- and gas turbines to generate electricity. But demand continues to shift to wind and solar energy, where GE has an emerging business.
Still, as GE’s financial condition improves, hopes for the dividend could follow. In December 2018, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, announced in November 2017 along with a broad restructuring, had halved the dividend to 12 cents.
The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends. GE stock’s current 4-cent annual payout offers a yield of 0.3%.
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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 rivals. Siemens Energy competes with GE in power. It emerged in September after Siemens (SIEGY) spun off its low-margin gas turbine business. Japan’s Mitsubishi Hitachi is another big power rival.
The diversified operations group ranks a dull No. 83 out of 197 industry groups tracked by IBD. It also includes 3M (MMM), Honeywell (HON) and Roper Technologies (ROP).
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Is GE Stock A Buy Now?
General Electric is making progress in its long, ambitious turnaround. GE earnings and cash flow are expected to further improve in 2021, with the Boeing 737 Max flying again. Signs continue to mount of a slow recovery in the airline industry, and the broader economy is recovering as well.
Moreover, GE’s financial position continues to improve as it lowers debt and costs, while building liquidity. The jet-leasing deal with AerCap should further help GE’s balance sheet.
Many analysts on Wall Street are bullish about GE’s current leadership and improving fundamentals. But others remain on the sidelines. And General Electric does not belong to a leading industry group.
From a technical perspective, GE stock remains far below a 14.52 buy point. Its RS line is lagging again.
Bottom line: GE stock is not a buy because it’s not in a proper buying zone.
Over the long term, buying an index fund, such as SPDR S&P 500 (SPY), would have delivered safer, higher returns than GE stock. If you want to invest in a large-cap stock, IBD offers several strong ideas here.
To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
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