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Has General Electric (GE) Reached Value Stock Territory?
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Shares of General Electric (GE - Free Report) slumped more than 1.5% in morning trading Thursday, adding to the conglomerate’s recent losses amid a tariff scare that has seen investors ditch major U.S. industrials and importers.
GE is now down more than 50% over the past year, and as mounting debt issues continue to create headwinds, this once-iconic American brand seems to be on the brink of losing its place in the global economic conversation.
But has the selloff extended too far? Could now be a great opportunity to buy GE at a major discount? Let’s take a closer look.
Recent Challenges
On top of sluggish activity in its core businesses and an intimidating debt pile, General Electric faces regulatory challenges. The company recently adopted new accounting standards that restated its earnings for fiscal 2016 and 2017—a move that came on the back of a Securities and Exchange Commission investigation into GE’s accounting for lengthy service contracts.
The once-dominant industrial behemoth also faces potential legal action over allegations that two of its financial units violated U.S. law related to subprime mortgages. General Electric is now looking to shed as much as $20 billion worth of assets to trim some of the fat from its existing structure.
Furthermore, President Trump’s recent tariffs on imported steel and aluminum could lead to a rapid rise in prices that would force GE to re-value its backlog, while an all-out trade war against a major economy like China could see companies like GE face retaliation.
What’s more, a recent analyst note from JPMorgan questioned whether General Electric’s earnings guidance is realistic. The firm argued that GE’s guidance for full-year earnings of $1.00 per share is “not credible” and fundamentally “disconnected” from its free cash flow guidance of $0.75 based on the effect of asset sales.
Current Valuation
Despite all these challenges, value investors might be interested in GE following its significant slump. After all, if the company avoids a catastrophic situation like bankruptcy, the stock could very well rebound from its current lows.
But even still, traditional valuation models do not show that GE is trading at any sort of discount right now. When considering companies in GE’s peer group, including other massive conglomerates like Honeywell (HON - Free Report) and United Technologies , its Forward P/E trend is hardly attractive:
Considering how drastically GE has been sold off within the past year, it might surprise investors to learn that the stock is still trading at a slight premium to its larger peer group. In addition to this unattractive P/E, General Electric’s PEG ratio of 2.6 is not great, and its current cash flow of $1.69 per share is less than the industry average of $2.05.
Overall, GE is holding a mediocre “C” grade for Value in our Style Scores system.
Estimate Revision Trends
General Electric is also currently sporting a Zacks Rank #4 (Sell). But the Zacks Rank does not necessarily consider the aforementioned valuation metrics. Instead, the proven strategy focuses on earnings estimates and estimates revisions to determine which stocks have an improving outlook and which stocks are trending in the wrong direction.
Here’s a look at the revision trend for GE:
As we can see, the Zacks Consensus Estimate has come down significantly on the back of universal downward agreement among revising analysts.
Some might assume that the worst of the damage is already done for GE, but analyst estimates actually tend to come down gradually over time. As GE continues to struggle, analysts could become increasingly bearish, adding even more volatility to the stock.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeneyon Twitter!
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Image: Bigstock
Has General Electric (GE) Reached Value Stock Territory?
Shares of General Electric (GE - Free Report) slumped more than 1.5% in morning trading Thursday, adding to the conglomerate’s recent losses amid a tariff scare that has seen investors ditch major U.S. industrials and importers.
GE is now down more than 50% over the past year, and as mounting debt issues continue to create headwinds, this once-iconic American brand seems to be on the brink of losing its place in the global economic conversation.
But has the selloff extended too far? Could now be a great opportunity to buy GE at a major discount? Let’s take a closer look.
Recent Challenges
On top of sluggish activity in its core businesses and an intimidating debt pile, General Electric faces regulatory challenges. The company recently adopted new accounting standards that restated its earnings for fiscal 2016 and 2017—a move that came on the back of a Securities and Exchange Commission investigation into GE’s accounting for lengthy service contracts.
The once-dominant industrial behemoth also faces potential legal action over allegations that two of its financial units violated U.S. law related to subprime mortgages. General Electric is now looking to shed as much as $20 billion worth of assets to trim some of the fat from its existing structure.
Furthermore, President Trump’s recent tariffs on imported steel and aluminum could lead to a rapid rise in prices that would force GE to re-value its backlog, while an all-out trade war against a major economy like China could see companies like GE face retaliation.
What’s more, a recent analyst note from JPMorgan questioned whether General Electric’s earnings guidance is realistic. The firm argued that GE’s guidance for full-year earnings of $1.00 per share is “not credible” and fundamentally “disconnected” from its free cash flow guidance of $0.75 based on the effect of asset sales.
Current Valuation
Despite all these challenges, value investors might be interested in GE following its significant slump. After all, if the company avoids a catastrophic situation like bankruptcy, the stock could very well rebound from its current lows.
But even still, traditional valuation models do not show that GE is trading at any sort of discount right now. When considering companies in GE’s peer group, including other massive conglomerates like Honeywell (HON - Free Report) and United Technologies , its Forward P/E trend is hardly attractive:
Considering how drastically GE has been sold off within the past year, it might surprise investors to learn that the stock is still trading at a slight premium to its larger peer group. In addition to this unattractive P/E, General Electric’s PEG ratio of 2.6 is not great, and its current cash flow of $1.69 per share is less than the industry average of $2.05.
Overall, GE is holding a mediocre “C” grade for Value in our Style Scores system.
Estimate Revision Trends
General Electric is also currently sporting a Zacks Rank #4 (Sell). But the Zacks Rank does not necessarily consider the aforementioned valuation metrics. Instead, the proven strategy focuses on earnings estimates and estimates revisions to determine which stocks have an improving outlook and which stocks are trending in the wrong direction.
Here’s a look at the revision trend for GE:
As we can see, the Zacks Consensus Estimate has come down significantly on the back of universal downward agreement among revising analysts.
Some might assume that the worst of the damage is already done for GE, but analyst estimates actually tend to come down gradually over time. As GE continues to struggle, analysts could become increasingly bearish, adding even more volatility to the stock.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>