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General Electric Is Best Left to Hardy Long-Term Investors

InvestorPlace logo InvestorPlace 6/16/2020 David Moadel
a sign in front of a brick building: General Electric Is Best Left to Hardy Long-Term Investors © Source: Jonathan Weiss / Shutterstock.com General Electric Is Best Left to Hardy Long-Term Investors

With 64,000 aircraft engines under its belt, you’d think General Electric’s (NYSE:GE) aviation segment would be flying high right about now. Judging from the price action of GE stock, however, it’s evident that the company’s still struggling to recover from the novel coronavirus shock.

a sign in front of a brick building: General Electric Is Best Left to Hardy Long-Term Investors © Provided by InvestorPlace General Electric Is Best Left to Hardy Long-Term Investors

The name General Electric might evoke images of light bulbs, but the world has changed and so has the company. At this point, it’s probably best to just think of General Electric as an aviation company. After all, in an apparent effort to become “a more focused industrial company,” General Electric sold off whatever tatters remained of its lighting segment in May.

In that light, let’s hone in on GE to see if it has what it takes to be a top-flight investment vehicle again.

A Closer Look at GE Stock

The pandemic-induced airline-market route undoubtedly took a major toll on General Electric’s stock price. Since late March, the bulls have been trying in vain to reclaim the $10 level.

In the short term, they’ll want to get the share price back above $13. That’s where GE was prior to the onset of the coronavirus crisis in the United States.

It will take longer to get it back to the $30 area, which was visited in 2016. That resistance level is so far in the rearview mirror now that it must feel like a pipe dream. The company’s paltry forward annual dividend yield of 0.58% isn’t helping much.

But dreams do come true sometimes, and a recovery in the airline market could be in the cards. That could give some “hope fuel” to frustrated and discouraged GE shareholders, thereby catalyzing a comeback in the stock price.

Look Out Below

If anyone’s been hoping for a swift recovery in General Electric’s aviation segment, let’s go ahead and throw some cold water on that right now. On that topic, GE Aviation CEO David Joyce offers little more than grim tidings:

“Global traffic is expected to be down approximately 80% in the second quarter when compared to the start of the pandemic’s effect in China in early February. Our aircraft manufacturers have announced reduced production schedules that will extend into 2021 and beyond reacting to the projected prolonged recovery.”

In other words, brace for more pain as there will be no soft landing in the foreseeable future. The only comfort, if we can really call it that, offered by Joyce comes in the area of cost reductions.

Specifically, Joyce anticipates 25% in cost reductions for this segment, including “$1 billion of cost actions and $2 billion of cash actions in 2020.”

Will a Slimmed-Down General Electric Be Enough?

Admittedly, scaling down is a reasonable response to the aviation-sector crisis. However, even a famous company like General Electric can’t downsize its way to prosperity. GE shareholders will want to see, above all else, signs of life as measured in terms of revenues.

On a page of General Electric’s first-quarter earnings-results presentation, on a page almost laughably titled “Aviation: what we’re seeing & doing today” it’s evident that what “we’re” seeing is an absolute train wreck. To wit, the page reports sharp year-over-year declines in commercial-services shop visits (60%), commercial “install engines” (roughly 45%) and commercial “spare engines” (roughly 60%).

A slimmer General Electric won’t be enough to change this distressing narrative and impress the company’s shareholders. In all probability, nothing less than a string of consecutive earnings beats will move the needle. That could happen somewhere down the road, but it’s not a good short-term bet.

The Takeaway on General Electric

Given the currently unfavorable aviation-market conditions, General Electric stock is primarily only a reasonable investment for patient long-term investors. In the short and medium terms, it’s best to stay on the ground and wish the shareholders a safe trip on their unsteady and somewhat risky flight.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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