General Electric Company (GE) is trading higher by more than 7% in Tuesday's pre-market despite missing fourth quarter 2020 earnings per share (EPS) estimates by $0.01 per share and guiding fiscal year 2021 well below consensus. The fallen industrial giant posted a profit of $0.08 per share on a 16.4% year-over-year revenue decline to $21.93 billion. The buy-the-news reaction reversed at the January peak near $12, keeping a breakout scenario on the table after the opening bell.
Mountains of Debt
The company reduced 2021 EPS guidance from $0.38 per share to a new range of just $0.15 to $0.25, reflecting a reduction in cash and profit from legacy businesses sold in 2020. Shareholders took that to heart, hoping that slimmed-down operations will improve General Electric's growth trajectory while the company works off mountains of debt. However, GE Industrial revenue won't help that goal, with 2021 growth projected in the "low single-digit range."
General Electric has taken aggressive steps to strengthen its balance sheet in the past three months, engaging in partnerships, acquisitions, and cost-saving initiatives that reduced pension debt by $2.5 billion. The company reduced total debt by approximately $14.5 billion in 2020 and $28 billion since the start of 2019. It also announced an SEC litigation settlement during the quarter and has benefited from the 737-MAX jetliner's return to the skies.
Wall Street consensus on General Electric has improved to "Overweight" in the past three months, with 14 "Buy," 1 "Overweight," and 6 "Hold" recommendations. More importantly, no analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $7.00 to a Street-high $21.00, while the stock is now trading about $1.40 below the median $13.00 target.
Debt load is the total amount of debt carried by an individual, government, or business. Publicly traded companies record their debt load on their balance sheets, providing investors with a snapshot of what they own and owe every quarter.
General Electric Monthly Chart (2007–2021)
General Electric stock fell to the single digits in 2009 and turned higher, entering a shallow uptrend that stalled in the low $30s in 2016. That marked the second lower high since 2007, signaling a long-term downtrend that is still in force, despite short-term upside. A 2017 selling wave gathered force into the fourth quarter of 2018, dropping GE to a 10-year low at $6.40. It carved a two-legged recovery into February 2020 and rolled over, slicing through 2019 support in March.
Price action completed a potential double bottom in October and turned sharply higher, stalling about 1.5 points below the 2020 peak in January 2021. The stock needs to mount that barrier to end the string of lower highs since 2016 and establish an intermediate uptrend. The uptick is also needed to confirm the double bottom reversal and set off a wave of buying interest that could reach the low $20s.
However, the 2020 high has narrowly aligned with the declining 50-month exponential moving average (EMA), marking a substantial barrier that will be tough to overcome. The stock broke this support level nearly four years ago and still hasn't tested new resistance. As a result, the reward-to-risk profile is not favorable for new entries right here, especially with General Electric issuing a 2021 profit warning. Even so, a pullback could offer a long-term buying opportunity for investors with extreme patience.
The risk/reward ratio marks the prospective reward investors can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns.
The Bottom Line
General Electric posted a mixed fourth quarter report that is unlikely to spark the buying interest needed to break major resistance above $13.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.