GE Stock A Buy? General Electric Split On Track Amid Several Big Headwinds

General Electric (GE) eyes a transformation as an aviation pure play. But inflation, China, Ukraine and overall recession fears threaten aviation’s recovery and GE earnings. Is GE stock a buy?

X

GE News

On April 26, General Electric gave a tepid outlook for 2022 after beating quarterly earnings views while missing on free cash flow. GE cited inflation pressures, supply challenges, China Covid lockdowns and the Russia-Ukraine war. Since then, U.S. recession fears have mounted as the Federal Reserve ramps up rate hikes to rein in inflation.

General Electric also said in late April that it’s on track to split into three separate, public companies. The new GE will focus on aviation.

But Russia’s invasion of Ukraine has created “too many uncertainties,” CEO Larry Culp has warned. Russia is a key supplier of titanium, used widely in the aerospace industry.

GE Stock Technical Analysis

Shares remain below key technical levels, with a lot of recovery work to do. GE stock is at the lowest level since November 2020, still below a falling 10-week moving average and even further below the 40-week average.

General Electric shares briefly broke out in November on news of GE’s three-way split. The breakout quickly fizzled and there’s no new buy point so far.

The relative strength line for GE stock shows significant lag, according to MarketSmith charts. It rallied for parts of 2020 and 2021 on hopes for GE’s turnaround. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.

The industrial giant earns a dull IBD Composite Rating of 37 out of 99. The rating combines key technical and fundamental metrics in a single score.

General Electric owns an RS Rating of 26, meaning it has outperformed 26% of all stocks over the past year. The Accumulation/Distribution Rating is an E, on a scale of A+ to a worst E. It’s a sign of considerable selling of GE shares by big institutions over the past 13 weeks.

GE remains a popular stock with strong institutional support. As of March, 1,859 funds owned shares. GE stock shows zero quarters of rising fund ownership, according to the IBD Stock Checkup tool.

IBD Live: A New Tool For Daily Stock Market Analysis

GE Earnings And Fundamental Analysis

On key earnings and sales metrics, GE stock earns an EPS Rating of 65 out of a best-possible 99, and an SMR Rating of E, on a scale of A+ (best) to E (worst). The EPS Rating compares a company’s earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.

For the March quarter, GE reported better-than-expected earnings of 24 cents. Revenue came in at $17.04 billion, also topping views.

General Electric burned through $880 million in cash, worse than views.

The company reported continued recovery in its flagship aviation business and strong demand in health care, but its energy businesses lagged. Revenue rose 12% and profits soared 42% in aviation. Revenue rose 1% in health care but fell 12% in renewables and 11% in power.

The FCF measure is closely watched as a sign of the health of GE’s operations and its ability to pay down debts. It fell 66% in 2020 but rebounded 857% in 2021, according to FactSet.

In all of 2022, analysts forecast GE earnings will jump 68% as sales rebound 2%. But they now expect General Electric to surpass 2019 EPS of $5.20 only in 2024, FactSet says.

Out of 22 analysts on Wall Street, 14 rate GE stock a buy. Two have a hold and no one has a sell.

Big GE Split Caps Long Restructuring

In 2024, GE will emerge as an aviation-focused company after a three-way breakup. The American industrial icon plans to spin off its lower-growth health and energy businesses to focus on aviation.

The three-way GE split caps years of dwindling profits and a costly restructuring. It closes a key chapter in General Electric’s 129-year-old history, with roots going back to Thomas Edison.

“Our GE investment thesis continues to be a breakup/sum-of-the-parts story,” RBC Capital Markets analyst Deane Dray wrote in an April 27 note. “We still see attractive upside in the breakup valuation, supporting our outperform rating.” But the analyst cut his price target on GE stock by $10 to $108.

Looking For The Next Big Stock Market Winners? Start With These 3 Steps

Headwinds For GE Aviation

Aviation — GE’s “crown jewel” — makes jet engines for plane makers including Boeing (BA) and Airbus (EADSY). GE Aviation also runs a lucrative aftermarket business for engine repair and maintenance.

In 2020, Boeing halted production of the 737 Max jet for a few months after two fatal flights, which weighed on Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. Engine shop visits slowed while leasing customers sought short-term deferrals. As a result, GE Aviation slashed jobs by 25% and later warned of more cuts.

Many of those headwinds have lifted. Meanwhile, the market continues to shift from widebody jets to longer-range, narrow-body aircraft, benefiting General Electric. A GE joint venture dominates the market for narrow-body jet engines.

During the pandemic, travel restrictions to halt the spread of Covid-19 negatively affected aircraft deliveries and orders.

Aerospace suppliers also struggled to deliver parts and equipment on time, due to pandemic-fueled shortages of semiconductor chips and plastics. Costs of aluminum and steel also rose.

How To Research Growth Stocks: This IBD Tool Simplifies The Search

Growing Momentum For GE Stock

CEO Culp’s top priority is improving General Electric’s financial position, while strengthening GE’s industrial core, as a maker of jet engines, gas turbines, wind turbines and hospital equipment.

In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.

But GE now touts recovery or stabilization in key business segments, including aviation.

Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.

As GE’s financial condition improves, hopes for the dividend could follow. In December 2018, a cash-challenged General Electric slashed the quarterly dividend to a token penny a share. An earlier cut, announced in November 2017 along with a broad restructuring, had halved the dividend to 12 cents.

The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends. After a reverse stock split in August, GE stock now offers a 32-cent annual payout, yielding 0.4%.

Stocks To Watch: Top-Rated IPOs, Big Caps And Growth Stocks

Rivals To General Electric

Rivals to General Electric include Raytheon Technologies (RTX) and Siemens Energy.

Raytheon and Rolls-Royce of Britain are major jet-engine rivals. Siemens Energy competes with GE in power. It emerged after Siemens (SIEGY) spun off its low-margin gas turbine business. Japan’s Mitsubishi Hitachi is another big power rival.

The diversified operations group ranks No. 70 out of 197 industry groups tracked by IBD. It includes 3M (MMM), Honeywell (HON) and Roper Technologies (ROP).

Catch The Next Big Winning Stock With MarketSmith

Is GE Stock A Buy Now?

General Electric continues its long, ambitious turnaround. GE earnings, sales and cash flow are expected to grow in 2022, as airlines and the broader economy slowly recover from the pandemic.

Moreover, General Electric’s poised for a huge transformation, breaking from its diversified past to focus on aviation.

New Covid-19 variants could threaten the commercial aviation recovery.

Covid shutdowns have waned in China, but the country’s “zero-Covid” policy make significant restrictions there likely for the foreseeable future.

The Russia-Ukraine war adds to business uncertainty.

More broadly, the risks of recession are mounting in the U.S. and Europe, as rate hikes to control inflation threaten an increasingly fragile economy.

For a cyclical industrial giant like General Electric, these are challenging headwinds.

Many analysts on Wall Street are bullish about GE’s current leadership and improving fundamentals. But others remain on the sidelines. GE belongs to an industry group that is acting relatively well.

From a technical perspective, GE stock is well below a falling 50-day average and lagging RS line. It has a ways to recover before a buy point can emerge.

Bottom line: GE stock is not a buy.

Over the long term, buying an index fund, such as SPDR S&P 500 (SPY), would have delivered safer, higher returns than GE stock. If you want to invest in a large-cap stock, IBD offers several strong ideas here.

To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.

YOU MAY ALSO LIKE:

Stocks To Buy: Is It Time To Buy Or Sell These Large-Cap Stocks?

See The Best Stocks To Buy And Watch

Find The Latest Stocks Hitting Buy Zones With MarketSmith

Join IBD Live And Learn Top Chart-Reading And Trading Techniques From The Pros