Every time shares of the once venerable, now embattled industrial conglomerate, General Electric (NYSE:GE), appear to be nearing a bottom, management drops yet another bombshell. The company’s recent Q3 earnings report, released on Tuesday, October 30, contained still more bad news, shattering any hope of a near-term recovery.
The company missed on both EPS and revenue. Just days later, on November 2, GE slashed its once reliable dividend to the nominal value of one penny per share. It also announced it would split its struggling power business into two units in order to accelerate operating improvements. Since then, the stock's slide has picked up speed. It closed yesterday at $9.28, its lowest level in nearly a decade.
Regulatory Review; No Full-Year Guidance
The latest twist in what seems like the company’s never-ending struggle: GE disclosed during its earnings call that the Securities and Exchange Commission (SEC) is expanding its review of the company’s accounting to include a $22 billion goodwill impairment charge GE is booking in its power division. While taking these drastic steps to free some cash that it so desperately needs, the company left its future up to investors’ imagination.
In its press release and presentation, GE didn’t provide an update on its full-year guidance. It had previously warned that it would fall short of an already stated goal of $1 to $1.07 in adjusted earnings per share and $6 billion of industrial free cash flow.
All of this caps an extremely painful two-year period for GE’s millions of investors who bought shares for the growing dividend income General Electric once provided stakeholders. As demand for its products—which include its flagship power business; gas, steam and wind turbines, oil field services and equipment, jet engines and turboprops, healthcare technologies, lighting products as well as energy and industrial financial services—have waned, the 126-year giant has been struggling to raise cash. Its shares are now at their lowest level since the 2008 Financial Crisis.
GE has been pursuing the possibility of spinning off its healthcare business as part of its broader restructuring plan to restore the company’s financial health, while also divesting its stake in oil services firm Baker Hughes, something that would effectively break up the company. The spin-off is expected to be completed in the next 12 to 18 months. Once these deals are done, the leaner GE will be left with jet engines, power plants and renewable energy units.
Positive Signs Emerging
In this atmosphere of extreme disappointment, perhaps the biggest questions for investors is whether this is the bottom for the stock and will the company be able to avoid bankruptcy?
We see some positive signs signaling the worst may be over for its shares. The most encouraging development is the recent appointment of new CEO Larry Culp, who seems to be willing to take on the very painful restructuring his predecessor avoided.
As well, the company will save about $3.9 billion a year by slashing its dividend. The move will also free up some cash, something GE badly needs in order to improve the health of its bloated balance sheet and reduce the company's reliance on high interest rate borrowing.
Some analysts are also praising Culp's decision to split the company’s ailing power unit. According to Barclays analyst Julian Mitchell, GE’s industrial-focused, power generation-equipment and grid businesses have respectable sales outlooks and their value may be overshadowed by issues in utility-class electricity generation. This internal breakup could be a first step toward divesting those healthier assets or further isolating the ones that are troubled.
As the shakeup accelerates under Culp's leadership, he's also showing that he has skin in the game. The new CEO bought $2.2 million worth of company stock last week, according to an SEC filing. Markets take CEO's insider buying moves as an important signal that a bottom has been reached—particularly when the company is struggling.
Culp bought 225,000 shares at an average price of $9.73 a share, just a day before the stock closed at the lowest point in nearly a decade. The purchase brings his total GE holdings to 416,000 shares. Culp previously acquired 191,000 shares on July 24 at $13.04 a share while he was still serving on GE's board, the filing said.
Bottom Line
Without doubt the GE's latest news was the worst for income investors who are now seeing their payout almost completely wiped out, something we've been predicting.
That said, it also shows the beginnings of very serious restructuring efforts from the company's new management, which should start showing results in 2019. In our view, GE stock under $10 per share could prove to be a good turnaround bet. However it will require a long-term approach and some patience.