Is General Electric (GE) A Buy After It Earns A Profit?
In the last few months, I’ve written two separate articles telling you to avoid GE stock…
Today, I want to answer the question – Is GE A Buy After It Earns A Surprise Profit?
Here’s a brief recap of what I said then about avoiding the stock before we get to today’s article…
If you want to read the past articles where I recommend avoiding GE, use the links above.
From Article #1 Linked Above
3 Stocks To Avoid Like The Corona – GE
General Electric (GE) used to be a stalwart blue-chip stock.
One that many families over the decades bought, held forever, and never even thought about selling.
But the company founded by Thomas Edison is now a shell of its former self.
In the last few years, it sold off divisions to keep up with the rapidly transforming business landscape. But it hasn’t done this well.
Its yearly revenues fell from $150.2 billion in 2010 to $93.5 billion in the last twelve months. Or a drop of 37.8% in 10 years.
Its operating margin fell from a high of 39.4% in 2011 to only 4.9% now. Or a fall of 87.6% in 9 years.
And its free cash flow production fell from 17.5% of sales in 2010 to only 2.9% in the most recent quarter of 2020.
Plus, GE also cut its dividend from a high of $0.93 per share in 2016 to just $0.04 per share in the most recent quarter.
This is a staggering decline of 95.7% in 4 years.
What’s this led to for GE shareholders in the last decade? Disaster.
If you owned GE shares from January 4th, 2010 to today on June 29th, 2020 your holding would now be down 41.5%… And this includes reinvested dividends.
A $10,000 investment in GE stock in January 2010 is now only worth $5,848… Again, including dividends.
GE was already on a steep decline before the coronavirus hit… But the impacts of the coronavirus look like it could cripple the company.
Stay away from GE stock.
From Article #2 Linked Above
This thesis to avoid GE continued to be proven out when it released its most up to date quarterly financials on July 29th, 2020.
- Total orders were down 38% in the 2nd quarter of 2020 to $13.8 billion from $19 billion in the 2nd quarter of 2019.
- Revenue was down 24% companywide in the 2nd quarter of 2020 to $17.7 billion compared to $23.4 billion in the 2nd quarter of 2019.
- Earnings per share were down in the 2nd quarter of 2020 to negative $0.26 per share from negative $0.01 per share in the 2nd quarter of 2019.
- GE also produced negative $2.1 billion in free cash flow in the 2nd quarter of 2020.
- So far this year its lost $4.3 billion in free cash flow in the six months to the end of this quarter.
- And every single one of GE’s divisions saw revenue fall and was unprofitable on a net income basis in the quarter.
Not good on any account.
As mentioned 2 months ago, GE was in massive trouble then due to its falling revenues, profits, and cash flow while debt levels remained too high.
These are all still the case. And have all gotten worse.
Except for debt levels.
Those fell by $9.1 billion in the last 12 months so far… But GE still has too much debt.
Especially considering that its unprofitable.
These are horrible combinations of things for the company going forward.
And because of them you should still stay away from GE stock.
This thesis to continue avoiding GE continued to play out when it released its most up to date quarterly earnings on October 28th 2020… Sort of.
- Sales were down 17% in the year to year quarterly period to $17.9 billion.
- It paid down $11.7 billion in debt.
- And it reported an adjusted net profit of $0.06 per share.
This net profit instead of loss was a major surprise to analysts. So much, that it sent GE shares rising as much as 4.5% on October 28th.
Pay special attention to the word adjusted in the last bullet above though.
Meaning these numbers aren’t consistent with Generally Accepted Accounting Principles (GAAP).
GAAP is the way United States based company’s get their books ready to fit accounting and legal regulations.
When you see the word adjusted it means the company adjusted these numbers.
And usually when a company adjusts numbers like this its almost 100% in their favor, so you need to be skeptical.
What did GE adjust here?
After all their adjustments they went from a net loss of $1.155 billion to a net profit of $513 million.
This is a difference in GE’s favor of $1.668 billion.
With the bulk of this difference coming from tax credits from its previous losses.
This leads to two questions…
- Did GE in a real-world sense earn a profit or not?
- Should we buy GE stock?
To figure this out I need to look at its operating profits and free cash flows because these are harder to manipulate.
On an operating profit basis GE lost $1.2 billion in the quarter.
On a free cash flow (FCF) basis GE earned $514 million in FCF in the quarter… Only because it sold an asset for $749 million though. And on a FCF basis its lost $3.8 billion so far this year.
No, GE is not profitable in a real-world sense.
And nothing I’ve seen in the quarterly report – even with the “earnings surprise” the media’s reporting – has changed drastically for the company.
This “surprise” profit is more of an accounting profit than a real-world economic profit.
It still has too much debt.
Is unprofitable in a real-world sense from its operations.
The coronavirus is still raging and will continue negatively affecting GE’s operations.
And revenues and orders are still way down.
For these reasons continue avoiding GE stock.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.