It’s a simple question, really: When should investors start buying General Electric Company (NYSE:GE) stock? Unfortunately, the answer is not simple. The industrial giant still has cash flow issues, although leadership is taking command behind new CEO John Flannery. But even with a solid plan now in place, it takes time to execute. All the while, the GE stock price continues to flounder.
What Do We Make of GE Stock?
The 50% dividend cut shouldn’t have been a surprise. Even though management said the dividend was a priority, it never said it was a guarantee. That’s something I have pointed out several times in the past, along with the company’s free-cash flow (FCF) and operating cash flow (OCF) issues.
Truth is, free-cash flow has been operating as a deficit for quite some time. Currently, GE’s trailing 12 months of FCF is negative to the tune of $ 2 billion, a far cry from the FCF it was generating just a few years ago. In fact, its OCF stood at $ 27.7 billion and $ 19.9 billion in 2014 and 2015, respectively. In fiscal 2016, it fell to a $ 244 million deficit.
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It’s improved this year, now standing near $ 4.2 billion over the past three quarters. But it’s no surprise the dividend had to be reduced and that Flannery is paring down businesses. Truth be told, I think this is the man to lead GE out the massive hole prior management had dug. With a mostly new board of directors and Flannery leading the charge, the company plans to cut jobs and pare off businesses it doesn’t need. This will allow GE’s true cash-flow generators to shine and its margins to increase.
The downside to all of this restructuring? It takes time. JPMorgan Chase & Co.‘s (NYSE:JPM) Stephen Tusa has been pretty spot on about GE, nailing nearly all of its decline this year. His current price target is $ 17. Consensus estimates call for earnings of $ 1.07 this year, down big from the $ 1.55 that analysts had forecast at the start of October.
But the issue compounds in 2018, where estimates call for earnings per share of $ 1.03. Only in 2019 — still a ways away and subject to revisions — does Wall Street expect a return to growth, forecasting earnings of $ 1.24 per share.
chart of GE stock price
Long-term chart of GE stock price. Click on image to enlarge.
In this respect, it’s hard to get excited about GE stock price. Earnings are forecast to fall 28% this year, while flat earnings growth in 2018 would be an achievement. That’s why for as much as GE stock has fallen, I think more downside could exist. There’s a plan in place, but it will take time to execute and there will be hiccups along the way.
Trading GE Stock Price
General Electric’s fall has been brutal for what’s supposed to be an industrial stalwart. Making matters worse, other industrial and aerospace players — like Boeing Co (NYSE:BA), Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX) — continue to knock it out of the park.
chart of GE stock price
Click on image to enlarge.
So what do we do with GE? Let’s look at the eight year chart. Some might consider $ 17.76 close enough to $ 17 to start buying. After all, they could buy now and use that significant level as a stop-loss. I would actually want to buy GE stock at $ 17 rather than stop-out at that level, though.
The reasoning is simple: GE stock price has blown through significant support level after level. Maybe $ 17 holds or maybe it gives way to $ 15. I don’t know yet, but I do know the fundamental outlook isn’t improving much over the next 9 to 15 months. Given that, there could easily be a lack of buyers, allowing shares to drift lower. My plan would be to buy a half-position at $ 17 and make it a full position at $ 15. If it never gets to $ 15, so be it. But I will at least have my toes in the water should GE stock price establish a bottom.
Further, it’s current lows near $ 17.50 don’t look guaranteed to hold. If we see $ 17, it’s time to buy. (For reference, at $ 16, GE stock would yield 3%.)
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
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