General Electric’s (GE) stock cratered by 56.6% throughout 2018, marking one of the worst years on record for the 126-year-old conglomerate. Shockingly, GE’s total decline from its top of about $31 in early 2017 equated to 78%, as the stock bottomed at just $6.65 roughly one month ago.
Clearly GE had its share of serious problems over the past two years. There’ve been unexpected billion-dollar write-downs, pension shortfalls, earnings misses, power business slowdown, dividend cuts and a slew of other issues that have sent investors running for cover over the past two years.
However, the good news is that the issues responsible for weighing on the company’s stock appear to be out in the open, are likely built into GE’s inordinately low stock price by now, and could be a thing of the past, much like 2018.
GE appears to be making the right moves necessary to get the company back on track to increasing efficiency, improving profitability, and expanding its stock price. With a new, capable CEO at its helm, GE should be able to reinvent itself, reduce debt substantially, and become a much leaner and more efficient industrial powerhouse of the 21st century.
Furthermore, the stock is illustrating strong indications of going through a long-term bottoming process. Therefore, I recently tripled my position in GE, as the company is likely to become a surprise outperformer in 2019.
1. New CEO at the Helm
Without diving too deeply into Lawrence Culp’s bio, I think it’s sufficient to say that GE’s new CEO is a very capable executive. After all, Mr. Culp graduated from Harvard Business School, and has proved to be a very successful executive over a period of several decades. Culp was CEO of Danaher Corporation from 2000 to 2014, during which time Culp engineered a very successful turnaround process which took the company’s market cap from under $10 billion to over $50.
I’ve argued the importance of an outsider filling the CEO spot at GE in prior articles, and I think Larry Culp may be the perfect candidate for the job. After all, one of GE’s biggest problems has been its overly bureaucratic, grossly entitled, and inefficient corporate culture. There is a lot of work to be done on reforming GE, it is a crucial step in improving the company fundamentally, and it can only be achieved by a true outsider.
Larry Culp is the first outsider to be named as CEO in the company’s 126-year history, and should help transform GE into a much more efficient and competitive enterprise of the 21stcentury.
2. Selling Off Units and Reducing Debt
GE has already spun-off some major segments of its portfolio, including its transportation interests, in a deal worth a reported $11.1 billion. The Webtec deal indicates that there is no fire sale at GE, and the company can get deals done on very favorable terms for its shareholders. Moreover, there is enormous value to be unlocked by spinning off more segments.
Next, GE plans to spin-off parts of its Healthcare unit, as well as its Baker Hughes interests. Through sales and spin-offs, the company plans to reduce its industrial debt position by about $25 billion by 2020, while maintaining a healthy amount of cash, roughly $15 billion on its balance sheet.
This strategy will enable GE to become a much healthier company from a financial standpoint, as a significant reduction in debt will lower GE’s interest payments substantially. Furthermore, the company will become a much more efficient enterprise, primarily focusing on its aviation and energy divisions. This dynamic should enable GE to improve its overall operational efficiency significantly, which should result in net income and EPS growth.
3. Classic Signs of a Bottom
The third reason why I tripled my position in GE is the overwhelming number of fundamental, psychological, and technical signals that suggest a long-term bottom has been put into GE’s stock.
Fundamental Signs – Where to begin? So much negative news has been factored into GE’s stock price over the past two years. There’re the earnings misses, disappointing guidance, multi-billion dollar write-offs, and liability shortfalls, dividend cuts, a Dow dismissal, and much more.
Sentiment has been horrid towards GE, and the stock has gotten pummeled the whole way. In fact, as the incremental bad news kept dripping over the past two years, GE’s market cap melted from around $300 billion to just $70 billion or so today.
However, it wasn’t until GE’s latest dividend cut that a true bottom in the stock could be reached. The company cut the remainder of its dividend by 92%, from 12 cents to just 1 penny, equating to a dividend yield of only about 0.5%. This move opened the selling floodgates as many market participants believed GE would not need to cut its dividend again, and many managers were forced to sell due to fund requirements and other factors.
In my view, it was the dividend cut that finally caused panic selling and the last wave of capitulation in the stock, which brought the price all the way down to a level comparable with the panic selling lows achieved in the great recession of 2008/09.
Back then GE was feared to be amongst the insolvent companies getting ready to crash and burn, and the stock ultimately bottomed at $6.66, a penny above GE’s recent low of $6.65. Incidentally, the latest dividend cut and the wave of selling that followed was also accompanied by “whispers” of possible insolvency issues at GE.
Contrarily, the latest dividend cut is crucial to GE’s long-term success, as it frees up about $3.9 billion in free cash flow for the company to utilize in this very challenging time. The dividend can and will likely be reinstated down the line when GE is operating at a more optimal level.
Also, just because the company’s earnings declined this year does not mean that this trend will continue. This year the company’s EPS collapsed to a projected 71 cents, quite the decline from the $1.05 GE achieved last year, and the $1.50 the company reported in 2016.
However, this will likely be the rock bottom year for GE, as EPS is projected to increase to 85 cents next year, and as the company’s financial position continues to improve so should earnings going forward. Furthermore, if we factor in GE’s projected EPS of 85 cents for 2019, we see that GE is currently trading at roughly 9.68 forward earnings, incredibly cheap.
Psychological Signs – Sentiment drives price, and the sentiment surrounding GE has been atrocious in recent years. GE went from being America’s industrial darling, and one of the most admired brands in the world, to one of the most troubled and despised companies in America. Investors had lost an unprecedented amount of money investing in the company, and the years of disappointing investments culminated in an atmosphere of extreme pessimism, despair, and capitulation.
However, it’s at times of rock bottom sentiment that a lasting long-term bottom is typically achieved in the share price. Just as sentiment feels like it cannot get any worse, it is likely to begin to shift, turn to a more a positive note, and ultimately improve substantially, driving the stock price substantially higher in the process.
Technical Signs – GE’s shares had declined by approximately 78% since the high of roughly $31 in early 2017. However, the latest freefall that began in late October broke the dam. Moreover, the precipitous declines coincided with Culp’s kitchen sink quarter and GE’s latest dividend cut.
The stock plummeted by about 50% in fewer than 2 months, and the enormous sell volume spread out over numerous sell heavy days was indicative of capitulation, panic like declines symbolic of a log-term bottom from a technical standpoint.
Since the $6.65 bottom, GE has surged by roughly 24%, essentially marking a new bull market in the shares. Furthermore, we can see that the technical image appears much more constructive momentum wise now. Also, we can see an upside-down head and shoulders pattern developing, as well as a cup and handle. Both patterns are indicative of a possible bottom and imply a likely probability for higher prices going forward.
The Bottom Line: GE Will be a Powerhouse Once Again
GE investors have been on a wild and scary ride over the past two years. The stock had declined by an unprecedented 78% in that time frame, and its latest leg lower caused the shares to collapse by about 50% in just weeks. The continuous drip of negative news flow devastated sentiment in the company, which resulted in a stock price at its lowest price point since the mid-90s.
However, with an outside CEO at the helm GE can substantially improve its corporate culture, increase efficiency and organizational efficacy, while growing earnings and EPS. GE will continue to spin-off businesses, a strategy that should unlock substantial value for shareholders, while reducing debt, and improving the company’s balance sheet at the same time.
GE should come out of the recent storm a much leaner, healthier, and a far more efficient enterprise. Sentiment should continue to strengthen in future months and years, as it becomes more evident that GE can continue to improve its market position. Numerous signs of a long-term bottom are present in the stock, and as sentiment along with the company’s earnings improves going forward, so should GE’s stock price.
I expect GE’s shares to double, possibly triple from here over the next few years, and that is why I recently tripled my position in GE.