General Electric (NYSE: GE) is a company that's struggling. That's been true for some time for the company that was once the envy of the stock market and the subject of many business school case studies. Now, the company continues to be the focus of business schools as analysts question its future.
Traders have been negative on the stock for much of the past year.
Of course in the late 1990s, GE was in a different position as the long term chart below shows.
The stock is now trading at levels briefly touched during the financial crisis and last seen in 1997. The question for investors is whether the company can rebound.
Barron's recently summarized the view of three analysts who cover the company.
Fundamentally, GE is lagging behind peers that continue to deliver 'beat-and-raise' quarters, and Davis admits that there isn't a quick fix for the stock.
That said, he argues that the shares, down 49% in the past year, are already discounting GE's many woes, but not any positive surprises "of any substance" on costs or asset sales.
Davis also points to "massive value creation" at other restructured companies, like Honeywell International (HON), Illinois Tool Works (ITW), etc., bolstering his case that the "success rate of break-ups and spin-offs is amazingly high in industrials," even for those businesses that investors think are permanently impaired.
Oppenheimer's Christopher Glynn is less enthusiastic. He reiterated a Perform rating on the shares, writing that GE's selloff was largely due to the narrowed free-cash-flow outlook on ongoing weakness in its power business.
He estimates GE's $6 billion 2018 free cash flow reflects about $2.3 billion for the remaining company after it sheds its healthcare unit, Baker Hughes (BHGE) dividends and other assets, and a pro forma market cap of $55 billion, compared with the current $115 billion market cap.
"Relative to $2.3B, not a compelling value siren," he concludes.
Finally, Barron's cited Argus's John Eade downgraded GE to Hold from Buy today, citing Friday's report.
He doesn't mince words, writing that he was bullish on the shares previously because he thought he saw signs of a turnaround in the company's first-quarter earnings.
"However, the second-quarter results were a step in the opposite direction," putting GE behind the eight-ball in terms of meeting its low-end full-year targets.
The "steady flow of bad news from the company," and its dividend cut was too much for Eade, a self-described long-term supporter of the stock.
No matter which analyst is right, the company could be a solid choice for income investors expecting a long term up trend in the stock.
For GE, a bull put spread could be opened with the August 10 put options. This trade can be opened by selling the August 10 $13 put option for about $0.35 and buying the August 10 $12 put for about $0.10.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $1 ($13 – $12). This is multiplied by 100 since each contract covers 100 shares.
The potential gain is about 33% of the amount of capital risked. This trade will be for about three weeks and the annualized rate of return provides a significant gain.