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General Electric Turnaround In Doubt Amid Severe Economic Downturn

Investors who’ve been watching closely to see how General Electric’s (NYSE:GE) turnaround takes shape will now be feeling very much more worried. The coronavirus pandemic is putting more pressure on the company’s precarious cash — something this industrial giant badly needs to get back on its feet.

General Electric last week warned its first-quarter earnings would be below its prior forecasts and pulled its financial guidance for the full year, citing the disruptions and uncertainty caused by the coronavirus pandemic.

GE now expects first-quarter earnings to be materially below its prior estimate of $0.10 a share. It expects cash flow from its industrial operations to be about negative $2 billion for the March quarter.

To ride through this severe economic downturn, which the International Monetary Fund predicted would be the steepest in almost a century, GE said on Monday that it was issuing $6 billion in new debt as part of a financial restructuring process. New bonds, which mature beginning in 2024, would be used to retire shorter-term debt.

But GE’s decision to issue more debt means more bad news in store for some analysts. JPMorgan analyst Stephen Tusa, who correctly predicted the company’s troubles in 2017 as demand for its industrial products collapsed, told clients in a note that GE was “the most expensive value trap we’ve seen.”

GE Weekly Price Chart

GE Weekly Price Chart

He kept his neutral rating on GE and lowered his target price to $5 from $6 a share. The stock, which closed at $6.93 a share on Tuesday, has fallen more than 37% this year. “We understand the allure of the simple stock chart that often makes the stock interesting to value buyers,” Tusa said, “but while the stock is down, so is FCF, by 100%+, while leverage has gone up.”

Before the Covid-19 pandemic, which forced governments around the world to put their citizens in lockdowns, analysts on the Street were turning more positive about the company’s revival. GE’s CEO Larry Culp had been restructuring its operations and trying to pull the company out of a slump caused by weak demand for its power generation equipment and troubles in its GE Capital unit.

A slump in its stock value, that started in 2017 and wiped out about $200 billion in equity, forced the company to slash its quarterly dividend to a token penny per share. To raise cash and pay down debt, GE has sold assets and exited from transportation and oil businesses.

One of the biggest setbacks for GE’s turnaround this year is coming from the aviation division, which makes jet engines for Boeing (NYSE:BA) and Airbus (OTC:EADSF) and has been generating positive cash flows. Since the health crisis grounded airlines, GE has furloughed half of the U.S. aviation manufacturing workers and laid off about 10% of its U.S. jet-engine workforce.

GE also faces rising retirement costs, with falling interest rates taking their toll on the company’s pension plan and likely requiring another $10 billion investment, if not more, according to John Inch, an analyst at Gordon Haskett. In addition, GE’s 36.8% stake in oil giant Baker Hughes (NYSE:BKR) has plunged by $6 billion over the past year as energy prices have plummeted.

Bottom Line

There is hardly any good news for GE in the current environment when the industrial economy is at a standstill. That situation makes GE’s turnaround more complicated and its stock a risky bet even at rock-bottom level.

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