Why the Market is Punishing General Electric Stock

An image of a quarterly report on a screen Credit: Shutterstock photo

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

With uncertainties swirling around General Electric (NYSE: GE ) stock, investors will probably not want to bid shares higher. But, while GE made a few moves that hurt the shareholder in the short-term, they should pay off in the long-term. It cut its dividend, will launch a tender process for appointing an auditor and is set to IPO its health business. The cash preservation from the dividend cut and the asset float will stabilize the company's balance sheet. From there, the new CEO could start the process of rebuilding the business.

GE shareholders undoubtedly wonder if the pain is over yet. The short answer is that it is too early to tell.

Near-term Risks for General Electric Stock

GE management may decide on an equity raise to further shore up the company's balance sheet. In light of the risks of a recession in 2019, GE will want more cash on its balance sheet, some of which it may use to cut its debt.

Costs associated with shutting down GE's gas turbines could result in a write-down in the quarter. It already set aside $480 million to repair its 9HA, 7HA and 9FB model turbines. Investors hope that GE resolves problems in the power division and faces no other additional costs. Even though the market accounted for such troubles since September, the stock is still getting punished. As a forward-pricing mechanism, the market is accounting for the potential of more costs ahead. And if it is right, it will drag on the company's future quarterly results, hurting GE's stock price.

Analyst Opinions

With General Electric stock closing below $7.00 a share before Christmas and the average analyst price target at $10.79 , the implied upside is over 55%. As shown below, the median price target is actually higher, at around $11 - $12. In the last two weeks, analysts started issuing "buy" opinions on General Electric stock.

AnalystFirmPositionPrice TargetDateJeffrey Sprague Vertical Research Buy $11.00 6 days ago Julian Mitchell Barclays Buy $12.00 8 days ago Stephen Tusa J.P. Morgan Hold $6.00 12 days ago Steven Winoker UBS Buy $12.00 12 days ago Christopher Glynn Oppenheimer Hold - 15 days ago Nicole Deblase Deutsche Bank Hold $7.00 25 days ago Rod Lache Wolfe Research Buy - Last month Deane Dray RBC Capital Buy $11.00 Last month Joe Ritchie Goldman Sachs Hold $9.00 Last month John G. Inch Gordon Haskett Capital Corporation Sell $10.00 Last month

Source: Tipranks

Revenue Outlook

Why the positive change in sentiment? According to , GE's annual revenue growth will fall by 1.4%. Revenue will be in the range of $116 billion-$119 billion through 2022. By 2022, two analysts have an average earnings target of $9.53 billion. Investors should treat this forecast with caution. 2022 is still a few years away. At present, GE is writing down so much that it is reporting losses from FY 2017 through to FY 2019. The $120 billion in revenue generated negative $300 million in cash flow in the quarter.

Balance Sheet Concerns

Take a look at GE's goodwill and intangibles and compare it to its cash on hand:

Period Ending(in millions)14-Dec15-Dec16-Dec17-Dec17-Jun18-Jun Cash & Equivalents 91,017 90,879 49,558 44,051 45,085 28,288 Goodwill & Intangibles 66,389 83,323 86,874 104,241

Source: (click on the link to obtain fair value on General Electric stock).

Cash levels fell most noticeably since FY 2014. It feels even more for the June quarter. Next, look at the dramatic increase in goodwill and intangibles between FY 2014 to FY 2017. The reason GE's stock is getting punished is due to the market pricing in more goodwill write-downs ahead. Already, this inflated number is propping up GE's balance sheet.

Asset Sales

GE will need to continue aggressively selling down assets, especially non-core businesses. If a downturn looms, the value of such assets could fall, so GE will benefit shareholders if it acts fast in raising its cash balance.

Takeaway on GE Stock

Shareholders were frozen and unable to do anything after General Electric stock broke down in November. Despite getting a strong CEO with a good track record, markets are already betting that GE will not fix its business. At this price, aggressive value investors may want to start a position in GE.

Those who are uncomfortable with the uncertainties around GE's future may want to wait. Once management sells its non-core businesses, raises cash, lowers is goodwill and cuts more of its debt, GE may be a less risky investment proposition.

As of this writing, Chris Lau has no positions in any securities mentioned.

More From InvestorPlace

Compare Brokers

The post Why the Market is Punishing General Electric Stock appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.