In my previous article, I mentioned how General Electric (NYSE:GE) stock is a bad investment and will continue to be so for the foreseeable future. Since then, not a lot has changed. In fact, things have gotten a tad bit worse, with shares trading at historic lows.
You know things went pear-shaped when there is a book out regarding your failed business strategies. Thomas Gryta and Ted Mant explore what went wrong with GE in ‘Lights Out.’ I am sure it’s an exciting read, but the issues plaguing GE are hardly a mystery.
With its aviation business in tatters due to the novel coronavirus pandemic and a significant portion of its healthcare business sold, it’s not a good time if you are a GE stockholder. Adding to its woes is the balance sheet — which is highly encumbered at this point. Total debt to EBITDA stood at 6.27 times — hardly cause for celebration, especially when sales are falling.
I am sure the company will pare down debt from proceeds received from the sale of Danaher (NYSE:DHR). Although a welcome development, General Electric will still struggle as the recovery period for Covid-19 is still vague at this point.
Because of these deep-seated issues, it will be ambitious for anyone to advocate investing in GE stock at the moment. Best to continue maintaining your distance.
Nonexistent Air Support for GE stock
We all know what Covid-19 has done to air travel. State governments are trying their level best to make sure citizens remain safe through enacting strict stay-at-home policies. Unfortunately, this has led to a steep drop in air traffic. Due to this, GE’s aviation business saw a substantial revenue fall in the first quarter. The division is critical to General Electric’s fortunes. If sales do not recover quickly, the company’s investment-grade ratings will be in serious trouble.
The latest quarter saw negative free cash flow to the tune of $1.3 billion. It is down significantly on a sequential basis from $5.027 billion in 2019.
Boeing (NYSE:BA) and Airbus (OTCPK:EADSY) delivered 10 and 36 commercial jets in June compared to 37 and 76 deliveries, respectively, in June 2019. Rolls-Royce (OTCPK:RYCEY) and GE provide the engines for these companies. Naturally, with orders down, revenues for the companies will remain stressed in the near and medium-term.
Segment Issues
One of the major concerns coming out of the sale of GE’s BioPharma business is that its healthcare business stands substantially depleted. In 2019, the biopharma business represented $1.3 billion out of $2.5 billion in total. Without the impetus of this division, GE Healthcare CEO Kieran Murphy believes the unit will report low single-digit sales growth in 2020, with things expected to improve marginally next year.
That is concerning since the company’s aviation, and power business is not growing at a healthy clip. CEO Larry Culp has done an excellent job of cutting costs, paying down debt, and scaling down where possible, but the demand is not there at the moment to effect a turnaround. At a time when the company is bleeding cash, you cannot expect the CEO to sanction additional power or renewables projects.
GE Digital Is Still an Enigma
In 2014, former GE CEO Jeff Immelt unveiled an ambitious plan to transform General Electric into an industry-leading software giant. His vision ultimately led to GE Digital; a software company focused on providing solutions to the manufacturing sector.
The new division was expected to rake in $15 billion a year in revenue by 2020. Recently, Culp revealed the digital business was “close to break-even,” so the original plans for the division have not materialized.
GE spent a sizeable chunk of its revenues to get this division up and running. Since General Electric does not release numbers connected with this unit, we can only guess what the future holds for this division.
Final Word on GE Stock
General Electric is a household name in the US and is certainly a lot of nostalgia attached to its shares. However, other companies within the division offer better fundamentals at attractive multiples. As I mention in this piece, there are several missteps that General Electric committed, which is why they find themselves in this predicament.
Larry Culp and the senior management at GE deserve a lot of credit in trying to get the company back to greener pastures. However, investors will be wary of pouring capital into a stock that has so many innate issues.
GE stock remains a sell for me.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.