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Is General Electric (GE) Doomed to Have a Terrible 2019 Too?
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The U.S. equity market has been witnessing volatility in 2018. The country’s broader indexes wholeheartedly welcomed the tax policy changes as well as enjoyed improved industrial activities and job markets.
However, the uptrends were short-lived as trade war escalated between the United States and China after the Trump government chose to impose tariffs on steel, aluminum and an array of other products. Further, inflation has been a hindrance, largely eroding corporate margins.
Year-to-date yields of the country’s prime stock indexes are in red — with S&P 500 down 2.8%, Dow Jones Industrial Average declining 2.5% and the NYSE dipping by 8.2%.
The unfavorable market backdrop and inherent weaknesses made the industrial giant General Electric Company (GE - Free Report) struggle during the year. The Zacks Rank #4 (Sell) company’s shares have declined nearly 59.3% year to date, worse than the S&P 500 and the industry’s decrease of 22.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company’s peer United Technologies Corporation declined 6.9% and Honeywell International Inc. (HON - Free Report) fell 11.1%.
Factors Troubling General Electric
The Power segment, historically one of the major growth drivers, is now creating headwinds for General Electric. Over time, the segment — engaged in the production of gas, steam and aero derivative turbines; generators and combined cycle systems — has been losing its sheen to growing popularity of renewable energy sources, overcapacity in the industry, macroeconomic challenges and geopolitical tensions. Industry experts opine that the Alstom acquisition aggravated the segment’s woes, especially impacting its margins.
In third-quarter 2018, the Power segment’s revenues declined 33% year over year and orders were down 18%. Profit margin dipped by 16.4 percentage points. Weakness in the segment was one of the prime reasons for General Electric’s poor performance in the quarter.
The Transportation business is battling with weakening locomotives end markets. In addition, exposure to the volatile finance sector and ballooning debt levels has been troubling General Electric over time. Additionally, frequent management changes, though made with an intention of a turnaround, is raising skepticism.
Remedial Steps Taken
General Electric’s current CEO, H. Lawrence Culp Jr. took some actions to restore belief in this conglomerate. Problems of financial flexibility are addressed through 91.7% cut in quarterly dividend rate from 12 cents to 1 cent. Through this action, the company will retain roughly $3.9 billion cash annually.
A reorganization plan has been chalked out for the ailing Power segment. The segment’s businesses are likely to be split into two — the first comprising of gas product and services groups, and the other dealing in steam, grid solutions, power conversion and nuclear businesses.
Further, CEO Lawrence Culp will follow the restructuring plan outlined by his predecessor in June this year. As planned, General Electric will turn GE Healthcare into a stand-alone company and dispose of its 62.5% interest stake in Baker Hughes, a GE company . GE Transportation will be sold to Wabtec and exposure to GE Capital business will be lowered.
These restructuring actions will enable General Electric to focus on Aviation, Power and Renewable Energy. The Aviation business will gain from rising passenger air travel (global) and growth in unit order while growth in shipments and project builds will benefit Renewable Energy.
Further, the company is taking initiatives to reduce structural costs by more than $2 billion in 2018 and generate corporate savings of more than $500 million, reducing debts for the Industrial business by $25 billion and maintaining a cash balance of $15 billion by 2020.
General Electric in 2019
Restructuring measures will aid General Electric in strengthening investor sentiment. However, these measures are less likely to witness any near-term impact. A few measures taken will be completed or nearing completion in 2019. Investors should wait and watch how General Electric performs in the months ahead.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
Image: Bigstock
Is General Electric (GE) Doomed to Have a Terrible 2019 Too?
The U.S. equity market has been witnessing volatility in 2018. The country’s broader indexes wholeheartedly welcomed the tax policy changes as well as enjoyed improved industrial activities and job markets.
However, the uptrends were short-lived as trade war escalated between the United States and China after the Trump government chose to impose tariffs on steel, aluminum and an array of other products. Further, inflation has been a hindrance, largely eroding corporate margins.
Year-to-date yields of the country’s prime stock indexes are in red — with S&P 500 down 2.8%, Dow Jones Industrial Average declining 2.5% and the NYSE dipping by 8.2%.
The unfavorable market backdrop and inherent weaknesses made the industrial giant General Electric Company (GE - Free Report) struggle during the year. The Zacks Rank #4 (Sell) company’s shares have declined nearly 59.3% year to date, worse than the S&P 500 and the industry’s decrease of 22.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company’s peer United Technologies Corporation declined 6.9% and Honeywell International Inc. (HON - Free Report) fell 11.1%.
Factors Troubling General Electric
The Power segment, historically one of the major growth drivers, is now creating headwinds for General Electric. Over time, the segment — engaged in the production of gas, steam and aero derivative turbines; generators and combined cycle systems — has been losing its sheen to growing popularity of renewable energy sources, overcapacity in the industry, macroeconomic challenges and geopolitical tensions. Industry experts opine that the Alstom acquisition aggravated the segment’s woes, especially impacting its margins.
In third-quarter 2018, the Power segment’s revenues declined 33% year over year and orders were down 18%. Profit margin dipped by 16.4 percentage points. Weakness in the segment was one of the prime reasons for General Electric’s poor performance in the quarter.
The Transportation business is battling with weakening locomotives end markets. In addition, exposure to the volatile finance sector and ballooning debt levels has been troubling General Electric over time. Additionally, frequent management changes, though made with an intention of a turnaround, is raising skepticism.
Remedial Steps Taken
General Electric’s current CEO, H. Lawrence Culp Jr. took some actions to restore belief in this conglomerate. Problems of financial flexibility are addressed through 91.7% cut in quarterly dividend rate from 12 cents to 1 cent. Through this action, the company will retain roughly $3.9 billion cash annually.
A reorganization plan has been chalked out for the ailing Power segment. The segment’s businesses are likely to be split into two — the first comprising of gas product and services groups, and the other dealing in steam, grid solutions, power conversion and nuclear businesses.
Further, CEO Lawrence Culp will follow the restructuring plan outlined by his predecessor in June this year. As planned, General Electric will turn GE Healthcare into a stand-alone company and dispose of its 62.5% interest stake in Baker Hughes, a GE company . GE Transportation will be sold to Wabtec and exposure to GE Capital business will be lowered.
These restructuring actions will enable General Electric to focus on Aviation, Power and Renewable Energy. The Aviation business will gain from rising passenger air travel (global) and growth in unit order while growth in shipments and project builds will benefit Renewable Energy.
Further, the company is taking initiatives to reduce structural costs by more than $2 billion in 2018 and generate corporate savings of more than $500 million, reducing debts for the Industrial business by $25 billion and maintaining a cash balance of $15 billion by 2020.
General Electric in 2019
Restructuring measures will aid General Electric in strengthening investor sentiment. However, these measures are less likely to witness any near-term impact. A few measures taken will be completed or nearing completion in 2019. Investors should wait and watch how General Electric performs in the months ahead.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>