Sometimes everything in the markets looks good on the surface. The Dow blew through 23,000 like a knife through butter, and the very preliminary views from this week are pointing to Dow 25,000 in 2018. And so far the economic numbers are recovering after two major hurricanes at the same time that earnings season is looking strong. Tax reform even has a better shot of coming after three decades.
Unfortunately, all this good news is not being felt universally. Investors who are overweight in General Electric Co. (NYSE: GE) are not getting to enjoy all of these great things happening in the U.S. economy and the rekindled global growth story.
24/7 Wall St. has covered General Electric’s earnings for years, and this week’s third-quarter earnings report that sank the stock was the worst post-recession report we have seen from any of the major conglomerates in years.
Now it’s time for shareholders to accept some realities that are likely to occur from 2018 through 2020. Some of these are issues outside of the company’s control, while other things addressed here likely have to happen for General Electric to prosper ahead.
Be advised that some of these things may be denied by GE’s new management. That doesn’t mean that they won’t occur, and it definitely does not mean that they should be ignored.
Also note that CEO John Flannery’s ultimate long-term views on the future of General Electric are not going to be showcased until November. That means long-term earnings per share guidance, its focus areas, its areas to be dumped or reduced. And everyone knows that goals and targets issues in one year may change handily throughout the business cycles ahead.
Here are 10 long-term issues that GE shareholders will have to consider for more than just the next few months or year.
1. Jeff Immelt and Prior Management Smearing
Whether this will come from the company itself or it will be made by analysts and the media remains to be seen. Jeff Immelt never had the halo around himself that Jack Welch did when he retired. Immelt took control of GE literally days before the 9/11 terror attacks in 2001, and that hamstrung his efforts to keep the company growing into what was already a very weak business climate and mild recession at the time.
Either way, Immelt and his prior team made many mistakes in buying assets high and dumping assets at what was proven to be low prices after the fact. If Immelt’s company jet habits have been leaked out, it seems fair to assume that Immelt’s tenure and the operations of Immelt’s top guard will have to keep taking some blame ahead.
2. Analysts Have to Adjust Their Price Targets Lower and Lower
When you get a situation of the sort that has been seen at GE in 2017, all those analysts with $33 and $35 targets that were late to lower them end up with the proverbial egg on their face. That means that GE’s analysts are likely not yet finished trimming their price targets. The consensus analyst target at the start of 2017 was $33.86 (versus a $31.60 share price at the time), and now that was down closer to $28 even before the earnings disappointment took GE to yet new 52-week lows.
Some analysts are going to say that there are many similarities between GE and IBM, and that means that a long-term growth strategy remains elusive. Other analysts may keep their Buy or Outperform ratings but will have to become more realistic on their price targets. If Buy and Outperform analyst ratings have implied total return expectations of 8% to 15% on most Dow and S&P 500 stocks, they can’t easily keep projecting 25% and 35% upside in GE.