Are GE Investors Still Tipsy on New Year's Champagne?

They seem to have gotten ahead of themselves.
Photographer: PIERRE ANDRIEU/AFP/Getty Images
As of 10:21 AM EST
14.61 USD

Beware of false starts at General Electric Co.

After plummeting 45 percent last year to notch its worst annual performance since the financial crisis, GE has enjoyed something of a renaissance to kick off 2018. The stock is up 9 percent and has flirted with the best year-to-date performance among members of the Dow Jones Industrial Average. 

It's Only the Beginning

Stocks that begin the year with big gains don't always hold on to them

Source: Bloomberg

The thing is, the outlook for GE hasn't changed much since November. That's when the company was forced to slash its dividend, finally  admitting -- after dramatic cuts to its guidance -- that its businesses wouldn't generate enough cash flow to fund its rich payout.  There's no quick fix for getting the company back on track; what lies ahead is a slow grind through another year of disappointing earnings and plans for $20 billion of divestitures.  

So it's a bit weird to see such a big gain in GE shares to start the year. Analysts have offered a variety of explanations as to why: Some think it's a re-balancing after a long stretch of selling at year-end, some say it might reflect a hope that GE has nowhere to go but up after sinking so low, while others point to higher oil prices that could help its energy businesses. But as a group, analysts don't think investors SHOULD be buying the stock here.

Reverse, Reverse

GE changed the way it reports earnings and its new target strips out pension investments and restructuring. Either way, it's a massive cut in its outlook.

Source: Bloomberg

NOTE: Updated guidance reflects the $1.035 mid-point (rounded) of GE's $1 to $1.07 range.

Only about 40 percent of the analysts tracked by Bloomberg recommend buying the shares, and it's worth noting that none of those "buy" ratings seem to be the result of a recent initiation or upgrade. They represent exactly the same stance the analysts espoused last year, a view that was, in hindsight, clearly wrong

The analysts who were (correctly) concerned about GE at this point in 2017 (and publish price targets) are on average expecting a share price of $17.50 for the company this year. That would be roughly in line with GE's low last year and would indicate an 8 percent decline from current levels -- basically wiping out all of that top-of-the-Dow gain so far this year. Those skeptics were right once before, weren't they? 

Fool Me Once

Analysts were by and large positive on GE for way too long

Source: Bloomberg

The fact is, GE is in for a tough slog. That's not to say new CEO John Flannery can't fix the company. Investors I've talked to recently think he has the right ideas, even if they had been hoping for more radical moves such as a breakup, or at least greater improvements as far as the transparency around the company's earnings metrics. But the company is the very definition of a show-me story: show me the struggles of the power business can in fact be remedied with cost cuts and better management, show me you can improve the cash flow of the company, show me you can actually meet your earnings targets -- and lastly,  show me that the disparate parts of GE belong together. 

As Flannery himself said, "I can say anything I want today and until we produce the results, it's not going to matter."  And that may not be for at least another year. Until then, buyers of GE stock may be looking at dead money. 

So Happy New Year, GE investors, but don't let the champagne go to your head.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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