GE is the Worst Dow Stock This Year, Can it Rebound in 2018?
On a whole, 2017 proved to be good year with the equity markets scripting some of their best performance. The benchmark S&P 500 index is up 20% year to date and is on the course to record its best performance in four years while Nasdaq has surged nearly 30%. Buoyed by a healthy economic growth and tax overhaul euphoria, the Dow Jones Industrial Average is up an impressive 25% year to date and is close to hitting the historic figure of 25,000.
However, not everything is perfect among the elite list of 30 stocks that comprise the Dow and the worst performing constituent among all the members happens to be the lone surviving component of the venerable blue-chip index that debuted in 1896. Industrial goods manufacturer General Electric Company GE has tanked 45% year to date — the worst performance by a Dow constituent by a huge margin while its peers like 3M Company MMM and United Technologies Corporation UTX boast a return of 31.5% and 16.1%, respectively. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
What Ails GE?
With about $27 billion revenues in 2016, GE Power was the largest business segment of the company in terms of corporate revenues. However, the business has been a drag on earnings in the last few quarters as global demand waned with increasing popularity of renewable energy sources, overcapacity, lower utilization and fewer outages. Industry experts opine that the acquisition of Alstom’s assets for $10 billion in 2015 further compounded the problems for GE, as it increased the employee count by approximately 65,000 with the addition of several field offices and manufacturing sites across the world. It seemed as if GE erred in its judgment about market demand and gambled on an industry that was on a decline.
This led to higher operating costs and contracted margins. The Industrial segment’s operating profit decreased 7% year over year in third-quarter 2017 to $3,501 million, with a decline in profits in Power (down 51%), Oil & Gas (down 35%) and Transportation (down 11%). GE also missed on third-quarter earnings while cash from operating industrial activities (excluding deal taxes and pension plan) declined 40% year over year to $1,740 million.
The Knee-Jerk Reactions
In order to boost its sagging shares, CEO John Flannery has decided to focus on just three core segments — power, aviation and health-care equipment and gradually exit all other businesses. At the same time, the company halved its quarterly dividend to 12 cents per share — the first dividend cut since 2009 at the peak of the recession. For 2018, the dividend allocation will be $4.2 billion, down from more than 100% of free cash flow to 60-70% while the dividend yield will be trimmed from 4.7% to 2.3%. A healthy dividend yield was one of the strongest enticements for GE investors and the dramatic plunge in share prices are testament to the fact that shareholders have been very critical of the turnaround plan.
For 2017, the company has also lowered its adjusted earnings guidance to $1.04-$1.12 per share from $1.60-$1.70. For 2018, GE expects adjusted earnings to be further down to $1.00-$1.07 per share and free cash flow at significantly reduced levels of $6 billion to $7 billion.
The company intends to lay off 12,000 employees across the globe in its GE Power business, as part of its corporate objective to lower operating costs and improve profitability. The drastic step seems to be the call of the hour as the beleaguered company aims to restructure its power business in tune with the evolving market conditions. In addition, GE aims to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the beleaguered power segment that sells electrical generation equipment. This Zacks Rank #5 (Strong Sell) firm further intends to sell assets worth $20 billion to improve its liquidity. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bumpy Road Ahead
Flannery has termed 2018 as “a reset year” and expects the company to stage a turnaround to reward its shareholders with risk-adjusted returns. Critics, however, have widely raised concerns about the efficacy of such steps. Although the dividend cut was expected, the proposed exits from other businesses surprised the investor community, who argued how a much smaller and more focused GE could actually be beneficial with lower revenue-generating opportunities. Deane Dray, an analyst at RBC Capital Markets observed, “The company’s turnaround will now be more protracted than previously anticipated.”
The drastic fall in share prices has mostly strengthened this opinion. Although some optimists would like to view this scenario as glass being half full rather being half empty, investors should rather remain cautious and weigh in their options for future.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
3M Company (MMM) : Free Stock Analysis Report
United Technologies Corporation (UTX) : Free Stock Analysis Report
General Electric Company (GE) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
