(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
General Electric Co’s (GE) stock this year has soared as high as 75% off its December lows as a rising number of analysts and investors have grown more positive about the company's outlook under its new CEO since October, H. Lawrence Culp, Jr.
But much of Wall Street, nonetheless, has remained deeply skeptical about GE's outlook, illustrated by the stock's 10% pullback in the past week, part of it spurred by published reports in Barron's that earnings may be inflated in company's airplane leasing unit. That decline has shaved GE's gains since its December low to more than 50%. On Tuesday, CEO Larry Culp told investors that GE's 'industrial free cash flow', will be negative in 2019, after generating $4.5 billion in 2018. Shares fell 4.7% on the news.
Deep Skepticism About GE
That's the short term. What's worse is that analysts are not optimistic the company will see much improvement in 2019 based on consensus estimates. For the year, analysts see earnings rising over 10% versus 2018’s dismal results, while revenue is forecast to fall by 6%.
A Steep Decline In Earnings
It was not long ago, in 2017, that analysts were forecasting GE would earn more than $2.00 per share this year. That was during a different time and under different leadership. Now analysts forecast earnings of just $0.72 per share, a 65% decline from those 2017 highs. Additionally, those earnings estimates have dropped 17% since the start of 2019. It is not just earnings estimates that have declined. Revenue estimates have fallen by 4% to $114.71 billion this year.
Part of the reason for the significant drop in revenue and earnings is that the company's series of asset sales, such as the recent $21 billion sale of its biotech business to Danaher Corp. (DHR). CEO Culp is taking big steps to de-leverage the balance sheet, which is laden with $100 billion in long-term debt and nearly $34 billion in pension liabilities.
When it comes to GE's stock, options trades and technical charts give dramatically opposing views of GE's future. The options are bearish while the technical charts are overwhelmingly bullish.
Options Project Wide Range of Uncertainty
Options trades project a sense of uncertainty regarding the direction of GE’s stock in 2019. It is so uncertain that the long straddle options strategy suggests that the equity rises or falls by as much as 32% from the $10 strike price by options expiration on January 17, 2020. It would place the shares in a trading range of $6.85 and $13.15 by the expiration date.
However, the number of bets at the $10 strike price is minuscule with just 1,600 bullish open call contracts to just 3,600 bearish open put contracts. The dollar amounts are even smaller with the calls valued at less than $300,000 and the puts valued at approximately $450,000. It would suggest that traders have little confidence in the direction of GE’s stock and are unwilling to place large bets.
Technical Charts Offers Bulls Hope
The technical charts, by contrast, are unusually bullish and project the stock rising towards a technical downtrend, one that has been in place since May 2018. Should the stock rise above that downtrend, it could trigger a breakout that may send the stock higher towards $12.50 and perhaps as high as $14.25. Those are the next two technical resistance levels for the stock.
Additionally, the relative strength index has been steadily trending higher in recent weeks, suggesting that bullish momentum is moving into the stock. However, the RSI is nearing overbought levels at nearly 70, and that would suggest that the stock may move lower in the short term before rising longterm.
Despite that bullishness, CEO Culp and GE must overcome a pervasive pessimism stemming from the downfall of what once was one of Wall Street's most revered blue chip companies. Its shares fell by nearly two-thirds from their five-year high, inflicting tens of billions of dollars in losses on investors. The year 2019 is when Culp will have the opportunity to position GE for a recovery. But even with that, it could take years for GE to turn around its operations, share price, and recoup the trust it lost on Wall Street.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past 12 months. Past performance is not indicative of future performance.