Investing in turnaround situations presents a major challenge: when must the call be made that a company has seen the worst and its shares are able to start a continuous upward movement?
Investors who viewed industrial giant General Electric Company (NYSE) ๐ In the past two years, a similar dilemma can be encountered these days. After a decline of more than 60% until the end of last year, GE's stock is now on a slow and gradual recovery path.
Trade for $ 11.29 at the end of yesterday, having won more than 50% in 2019, creating some excitement for the bulls wanting to see this controversial conglomerate resurrect so that they can reap the benefits of their bet can harvest from the beaten from stock.
General Electric monthly chart
The biggest impetus for his inventory increase this year came when GE reported his third quarter last month, showing that his cash flow situation is improving and some of his industrial units are beginning to show signs of life.
That achievement is something the new CEO of the company, Larry Culp, has been promising since he took over the job of saving the GE ship from sinking more than a year ago, as demand for its key products dropped and debt level balloon flight to an alarming level.
What excited investors this time is the company's improved cash flow forecast for 2019 – the second consecutive quarter that GE could do, helped by some signs of a revival in its industrial activities, which will generate a whopping $ 2 billion in free cash this year. That amount is double the previously expected number of no more than $ 1 billion.
There are many reasons for optimists to encourage the latest earnings report.
First, the turbine unit, apart from the growth of GE in the third quarter, suggested that the turnaround is deepening. The industrial activities generated $ 650 million in adjusted free cash flow, one of the most viewed statistics for GE investors.
Sales of the company's aviation unit increased 8.4% despite the huge exposure to Boeing Co (NYSE :). The division makes engines for the 737 Max, which has been grounded since March after two deadly crashes.
& # 39; Not Much Controversy & # 39; This Time
GE's aviation and healthcare departments now appear to be much stronger over a leaner horizon. They generated a profit of $ 7.5 billion in the first nine months of fiscal 2019, with a profit margin of 19.4%.
On the other hand, the power business of the company continues to struggle. The number of orders fell by 30% in the third quarter, suggesting that this unit will continue to deflate cash and possibly delay a recovery.
Another negative point that investors should not ignore is GE's struggling insurance business. The company said it would take a $ 1 billion pre-tax premium deficit related to its insurance activities, mainly due to a fall in interest rates. Promising significant improvement at GE's manufacturing companies over the next few years, Culp said in a statement on October 30:
รขโฌลOur results reflect another quarter of the progress in GE's transformation. We are encouraged by our strong backlog, organic growth, margin expansion and positive cash trajectory amid global macro uncertainty. "
"I remain convinced that we will unlock value for GE's stakeholders as our transformation accelerates."
Analysts on the street sound a little more positive about the company, including JPMorgan & # 39; s analyst Stephen Tusa, who is the most accurate predictor when it comes to GE.
"There is not much controversy here," said Tusa, who has a & # 39; sale & # 39; call on the shares with the target price of $ 5 per share, in a note.
There were "some wells and takes but probably received as better than feared, and the stock should recoup some of its recent underperformance," he added.
At present, eight out of 20 analysts have a "buy" ratio on GE shares, two recommend selling, while 10 assign a "hold" rating, with an average price target of $ 10.77 for the next 12 months.
Bottom Line
The restructuring of GE remains a work-in-progress, with some signs that the turnaround of Culp is making its appearance. Despite this optimism, investors should note that GE shares are only 3.5% higher than the time that Culp took over as CEO on September 30, 2018. With so much happening at GE, it is difficult to conclude what kind of business will ultimately arise when all the restructuring and assets have been sold. For these reasons, we do not recommend buying GE shares.
