Shares of General Electric Co. (GE) skyrocketed during Monday’s session toward their highest level in four months. Investors poured money into shares of the conglomerate on news that it plans to sell another area of its business as part of the company’s ongoing spin-off strategy.
Monday’s sale marks yet another move in General Electric’s plan to save its once-thriving business. With today’s gain happening amid the stock’s nearly 64% decline in the last two years, investors are still kicking around the idea of whether or not this spin-off strategy represents a long-term rebound or short-term way to save face.
Let’s take a deeper dive into GE’s most recent deal – and why it shouldn’t persuade investors to believe the stock will keep rebounding…
The News
Early Monday morning, fellow conglomerate Danaher Corp. (DHR) announced plans to purchase part of General Electric’s biopharmaceutical arm – called GE Life Sciences – for $21.4 billion in cash. GE CEO Larry Culp, who actually headed Danaher from 2001 to 2014 and had expressed interest in spinning of GE’s entire healthcare unit, cited the sale as integral to his overarching goal of “managing the remaining core business.”
The sale is a big win for GE, which sold the business for far more than what it has earned in recent years. According to recent filings, the biopharma arm brought in about $3 billion in revenue last year. That puts the $21.4 billion price tag at a more than 613% premium to its total 2018 revenue.
How Investors Reacted
Investors reacted positively to this new move to wind down GE’s exorbitant debt on its balance sheet, which has been responsible for much of the negative sentiment surrounding GE stock in recent years.
Shares soared 6.4% to close Monday’s session at $10.82, the best settlement since $11.16 on Oct. 29. Danaher stock surprisingly posted even bigger gains, with shares rallying 8.5% on the day to close at an all-time high of $123.15. Companies making an acquisition typically decline in stock price, as investors assume that the millions or billions spent on a purchase will negatively affect the bottom line.
However, it’s important to note that GE shares remain weak from a longer-term technical perspective. According to FactSet Research Systems Inc. (FDS), GE’s 200-day moving average (MA) currently sits near $11.36, which the stock hasn’t touched since Jan. 19, 2017. That marks the longest streak below the 200-day MA since FactSet began compiling data in February 1979.
The Bigger Picture
As one of the most iconic companies in the history of American business, GE’s rise and recent fall has been nothing short of Shakespearean among investors. Arbiters of the stock’s enormous 64% decline since 2016 include multiple CEO shuffles and the company’s gargantuan debt, which reached as high as $115 billion late last year.
The story of how GE’s debt load ballooned to such insane levels primarily started, as most business catastrophes did, in 2008. After CEO John Welch Jr. exited the company, it became clear that the firm’s financial services business – called GE Capital – weighed heaviest on the balance sheet, as it would’ve foundered had Warren Buffett not stepped in to invest $3 billion to turn the company around.
While the company persevered, new CEO Jeffrey Immelt’s leadership was characterized by several decisions that not only put GE further in debt but also destroyed investors’ faith in the stock. The firm went through with many questionable purchases, notably the $9.5 billion acquisition of French rail company Alstom SA in 2015 that was widely considered a mistake after the French government forced GE to make several modifications to the original deal.
As conditions grew from bad to worse, John Flannery eventually replaced Immelt and oversaw arguably the most apparent indicator of the firm’s downward spiral. On June 19, 2018, GE was dropped from the Dow Jones Industrial Average after more than 100 years on the index. It was replaced with Walgreens Boots Alliance Inc. (WBA)
Then came the series of massive dividend cuts that began in December 2017 when the firm slashed the quarterly payout in half from $0.24 per share to $0.12. Investors largely viewed the cut as damage control, dragging the stock price down more than 7% that December from $17.45 to $16.17. Just two months after new CEO Larry Culp took the reins, he instituted the most egregious dividend cut yet with a reduction to just $0.01 per share last December, leaving shareholders to assume the company would soon get rid of the dividend policy altogether.
Now, GE selling its biopharma business on Monday is the newest evidence of the firm’s race to sell itself as quickly as possible to avoid the stock dropping to zero. It follows last year’s sale of its stake in oil services company Baker Hughes Inc. (BHI), which it owned for roughly a year, and the sale of GE Healthcare’s information technology (IT) business to Veritas Capital – all in an effort to create what executives call a “simpler, more focused GE.”
Looking Ahead
There’s really been no shortage of bad news for GE investors hanging on to a company grappling with an identity crisis amid a shifting business landscape. General Electric the “pioneer” – known for providing affordable electricity at the dawn of industrial America in the late 19th century – has turned into General Electric the “loser” as it remains one of the most embattled public companies in recent memory.
Even with today’s sale propping the stock up to four-month highs, investors looking to place their money in a safe, stalwart company should look elsewhere. The cost-cutting is set to continue, making GE’s prospects as a long-term investment hazy and downright risky.