It has been a forgettable year for most businesses. Industrial giant General Electric (NYSE:GE) is one of the hardest-hit companies due to the novel coronavirus, as GE stock shed more than 40% of its value since the beginning of the year.
The bulk of the lockdown falls in the second quarter, which has been understandably nasty. The company’s revenues tumbled 24% year-over-year to $17.8 billion. The slowdown in aviation has widened its loss per share from 5 cents to 15 cents.
However, there are some positives for investors who are interested in GE stock. For starters, the impact on cash flow was lower than management estimates. Moreover, it has been successful in lowering its near-term liquidity needs through its effective capital structure management.
Nevertheless, the sluggish recovery in the travel industry is likely to weigh on its performance for the foreseeable future. Let’s take a look at what you need to consider before investing in General Electric right now.
Dismal Second Quarter Results
Aviation has been the company’s cash cow for years now, offsetting losses from other divisions. However, Covid 19 has completely changed the landscape for the division. Revenue from the sector is down 44% year over year, which is its most significant drop in recent memory. Additionally, orders plummeted 56%. In particular, the company reported only 178 orders of its LEAP engines, which is more than 250 less engine orders in the same quarter the prior year.
The slowdown impacted virtually every part of the segment. Commercial engine activity and CSA billings were down 50% and 60% year-over-year, respectively. Additionally, GE’s GECAS business was marred by a sizeable number of customer deferral requests. To curb losses in the segment, cost-cutting measures are underway. The goal is to reduce expenses by $1 billion.
Unfortunately for General Electric, other high margin segments such as power suffered the same fate as aviation. Revenues for the second quarter were $4.16 billion, 11% lower than the second quarter last year. Revenues from other operations for the company declined as well. Renewable energy and healthcare witnessed a 3% and 21% drop in revenues year-over-year. Overall, operating cash flows fell by a massive 247% in the quarter.
But while there were plenty of negatives, it wasn’t all doom and gloom for GE stock.
The Positives
One of the bright spots of the company’s second-quarter results was its balance sheet. Through belt-tightening measures and asset sales, total debt has declined by $22 billion since the start of 2019. Additionally, it has also reduced near-term liquidity needs by a whopping $10.5 billion through various debt offerings and repayments. It also plans to divest its 37% stake in Baker Hughes (NYSE:BKR) in the next three years.
Secondly, aircraft utilization has immensely improved. Departures in July recovered by 33% compared to the dismal numbers in April. The recovery is likely to generate high-margin revenue for the company’s aviation division. Flight activity is gradually improving, and most airline companies believe a full recovery could be deferred until 2024.
Additionally, the company’s smart long-term plays in renewable energy put it in an incredible position to take advantage of future tailwinds in the sector. Although its 2019 performance in the sector was relatively weak, it hasn’t impacted the company’s resolve. GE is investing heavily in the growing global offshore wind market with its 12-megawatt Haliade-X model set to launch next year. However, the focus needs to be on its hydropower and electrical grid equipment, which faces the most challenges.
Moreover, GE has been aggressively expanding its intelligent health ecosystem, putting it in a great position to take advantage of the “health-tech” revolution.
The Final Word on GE Stock
Some positives remain for GE stock, but it’s tough to buy the stock at this time. Its recovery in the aviation industry is sluggish, and a substantial recovery seems way off. Its long-term plays in renewable energy and healthcare can prove to be critical for its success down the line.
Overall, though, I’m bearish about GE stock’s prospects.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.