Why General Electric shares could be a value trap for years to come


McKinney said he’ll continue to watch GE for a re-entry point, but thinks that could be a few years away.

“Even on the lowered earnings guidance, it’s still not terribly cheap,” he said. “Turning around GE is going to be like turning around a massive ship. If they’re successful at it, they could be another Microsoft. If that’s going to be a multi-year turnaround, there’s absolutely no reason to be the first ones in.”

Indeed, GE cut its guidance to $1 to $1.07 a share from the $1.60 to $1.70 the company had indicated following its second-quarter earnings release. Though it lowered the bar, the company still faces a share price that looks at least fully valued and probably a little overvalued even by standard metrics.

Even after another share plunge Tuesday, the stock still traded at nearly 21 times earnings. That’s above the S&P 500‘s 18.4 times P/E and just ahead of the 19.3 P/E that the industrial sector is carrying.

Investors now also have to factor in that dividend cut, which will see the quarterly payout slashed in half to 12 cents a share. The dividend yield will still be considerably above its peers.

Investors looking for signs of when to get back into GE should be watching how the value equation plays out.

“We’re value investors, but we do like to incorporate momentum,” McKinney said. “We’re not trying to bottom-fish. We’d rather be six months too late than six months too early.”

GE CEO Flannery told CNBC in a Tuesday interview that he is “not surprised by the investor reaction” as investors had to digest a lot of “tough news.”

His investor day presentation Monday also drew some grousing that it wasn’t specific enough about the changes.

But Jim Corridore, the director of industrials equity research at CFRA, said he was impressed by Flannery’s performance and thinks investors should watch the company closely. That’s what CFRA, which has a hold rating on the stock, will be doing as well.

“I’m not seeing a lot of extreme value here, though certainly it’s a little more value than it was a couple days ago,” Corridore said. “Not only is 2018 a reset year, but 2019 and beyond they’re talking about 2 to 4 percent organic growth. That’s nothing to get excited about.”

WATCH: An analyst give a time frame for when GE could stock could get attractive again.

Source link