Most of the time, a company’s CEO is supposed to serve as a cheerleader. In the case of General Electric (NYSE:GE) CEO Larry Culp, however, he’s not giving holders of GE stock much to cheer about lately.
Honesty is supposed to be the best policy in life, but is it possible that Culp’s being too honest for his own good? His warning might be perceived as ill-timed as the world struggles to recover from the novel coronavirus.
Not that every company is struggling. Indeed, many stocks have recovered faster than GE stock, which still has a ways to go before it reclaims its mid-February peak.
So, what exactly did GE’s CEO say? And should his words dissuade you from buying the stock? Let’s drill down into the data and see if we can extract some clarity from the chaos.
Is Culp Culpable?
You may recall the exciting time when Larry Culp took over as the company’s chief executive in October 2018. Hopes for a turnaround ran at a fever pitch after several troubled years for General Electric.
And in fact, GE stock did rally from late 2018 until February 2020. The shares weren’t anywhere near their 2000 high point, however, which was above $55. Still, the company and its stock seemed to be on the right track at least.
Then came the spread of the novel coronavirus. This took a toll on many companies as their supply chains shut down. Plus, the travel industry suffered as consumers stayed home and kept a tight grip on their pocketbooks.
And unfortunately for General Electric, the company’s largest business segment, based on revenues, was the particularly hard-hit GE Aviation.
GE Aviation makes engines for Boeing’s (NYSE:BA) 737 Max airplanes, and that’s important to General Electric’s business. The aviation industry is still struggling to recover as airlines grounded many planes amid the crisis.
The onset of Covid-19 and the grounding of those planes aren’t Culp’s fault, of course. Therefore, investors shouldn’t blame the CEO for this year’s drop in GE stock.
That being said, a recent warning might signal an ongoing struggle for General Electric’s long-term shareholders.
The Chief’s Dire Prediction
If GE stockholders were expecting a reassuring tone from Culp, they must have been quite disappointed as the chief executive issued a strong warning recently.
During the Bernstein Strategic Decisions Conference, Culp suggested that General Electric’s cash burn in this year’s second quarter may actually double the company’s cash burn during the first quarter, which itself was considerable at $2.2 billion.
To be fair, the CEO’s full statement on this topic wasn’t all bad:
“We, at this point, think in the second quarter, we’re going to see our free cash flow number come in at a negative level, probably in the $3.5-to-$4.5 billion band, as best as we can tell today. We think that gets better in the second half of the year, but I think 2020 is likely to be a negative free cash flow year for GE, as we take those cost and cash actions, and prepare for a recovery given what we see today, for 2021 to be positive.”
It would require a very optimistic outlook to view that statement as positive. Many investors likely just see the negative $3.5 billion to $4.5 billion cash flow prediction and want to run for the hills.
Fortunately, General Electric has implemented $2 billion worth of cost-cutting measures. Plus, it has undertaken $3 billion in cash-conservation actions.
But Culp conceded that those cost-cutting and cash-conservation measures “won’t nearly be enough” due to the aviation industry’s “multiyear challenge.” As an investor, those aren’t words you want to hear during an ongoing crisis.
My Takeaway on GE Stock
Do Culp’s cheerleading skills simply need a tune-up? Or is he just being refreshingly honest? Feel free to debate that question if you’d like, but either way, it all seems to spell trouble for GE stock.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.